Rational-Expectations Equilibrium in Intermediate Good Markets

35 Pages Posted: 23 Mar 2010

See all articles by Robert S. Gibbons

Robert S. Gibbons

Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)

Richard Holden

University of Chicago

Michael L. Powell

Massachusetts Institute of Technology (MIT)

Multiple version iconThere are 2 versions of this paper

Date Written: March 17, 2010

Abstract

We analyze a rational-expectations model of information acquisition and price formation in an intermediate-good market: prices and net supply are non-negative, there are no noise traders, and the intermediate good has multiple potential uses. Several of our results differ from the classic Grossman-Stiglitz approach. For example, the price mechanism is more informative at high and low prices and potentially uninformative at middle prices. Also, an informed trade by a producer of one final good amounts to a noise trade from the perspective of a producer of another final good, so (a) as the price mechanism becomes more informative for producers of one final good, it becomes less informative for producers of others, who therefore have a stronger incentive to acquire information, so information acquisition has the strategic-complements property between groups, and (b) having more producers (in multiple groups) become informed need not increase the informativeness of the price mechanism.

Keywords: rational-expectations model, markets

JEL Classification: D80, G10

Suggested Citation

Gibbons, Robert S. and Holden, Richard and Powell, Michael L., Rational-Expectations Equilibrium in Intermediate Good Markets (March 17, 2010). MIT Sloan Research Paper No. 4775-10. Available at SSRN: https://ssrn.com/abstract=1573869 or http://dx.doi.org/10.2139/ssrn.1573869

Robert S. Gibbons (Contact Author)

Massachusetts Institute of Technology - Sloan School and Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Richard Holden

University of Chicago ( email )

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Michael L. Powell

Massachusetts Institute of Technology (MIT) ( email )

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Cambridge, MA 02139-4307
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