Market Efficiency and Real Efficiency: The Connect and Disconnect via Feedback Effects

We study a model to explore the (dis)connect between market efficiency and real efficiency when real decision makers learn information from the market to guide their actions. We emphasize two channels that determine whether the two efficiency concepts are aligned. The "externality channel" says that individual learning outcomes may not always map into real efficiency because the presence of externality causes real decision makers to overuse the price information. The "(mis)match channel" emphasizes the fact that market efficiency concerns how much information the market reveals about the overall firm value, while improving real efficiency needs the market to reveal much information that is relevant for real decisions. Our analysis highlights the delicate link between market efficiency and real efficiency.

Keywords: Market Efficiency, Real Efficiency, Feedback Effects, Externality

JEL Classification: D61, D62, G14, G30

Suggested Citation: Suggested Citation

Goldstein, Itay and Yang, Liyan, Market Efficiency and Real Efficiency: The Connect and Disconnect via Feedback Effects (January 12, 2014). American Finance Association 2015 Annual Meeting, ASSA Econometric Society 2014 Meetings, Society for Economic Dynamics 2014 Annual Meeting, 2014 China International Conference in Finance, Rotman School of Management Working Paper No. 2378120, Available at SSRN: https://ssrn.com/abstract=2378120 or http://dx.doi.org/10.2139/ssrn.2378120