Asymmetric Information in a Competitive Market Game: Reexamining The Implications of Rational Expectations

: We examine price formation in a simple static model with asymmetric information, an infinite number of risk neutral traders and no noise traders. Here we re-examine four results associated with rational expectations models relating to the existence of fully revealing equilibrium prices, the advantage of becoming informed, the costly acquisition of information, and the impossibility of having equilibrium prices with higher volatility than the underlying fundamentals. Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125, jacksonm @hss.caltech.edu Department of Economics, The Ohio State University, 1945 N. High Street, Columbus OH 43210-1172, peck.33@osu.edu Jackson gratefully acknowledges support under grant SBR--9223338 of the National Science Foundation. An earlier version of this paper appeared as Jackson and Peck (1993). We thank a referee for helpful comments. 1. Introduction Milgrom (1981) and Dubey, Geanakoplos, and Shubik (1987) offer powerful critiques of...