Reconsidering the Impossibility of Informationally Efficient Markets
25 Pages Posted: 1 Jun 2005
Date Written: March 2005
This paper reconsiders Grossman and Stiglitz's (1980) analysis and delivers a comparative static result which the original exhibition misses. In detail, an increase of the payoff of the risk free security is reported to affect the informativeness of the rational expectations equilibrium adversely. Furthermore, contrary to Grossman and Stiglitz (1980) both the noisy rational expectations equilibrium and the equilibrium in the market for information are characterized explicitly as functions of the underlying economy's parameters. The incompatibility of a fully revealing rational expectations equilibrium and costly acquisition of private information is obtained by means of an argument borrowed from linear regression theory.
Keywords: Noisy rational expectations equilibrium, informational efficiency, market for information
JEL Classification: G14, D82, D41
Suggested Citation: Suggested Citation