COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 634R

"Revelation of Information in Strategic Market Games:
A Critique of Rational Expectations"

Pradeep Dubey, John Geanakoplos and Martin Shubik

November 1982
Revised March 1985

We criticize the R.E.E. approach to asymmetric information general equilibrium because it does not explain how information gets "into" the prices. This leads to well-known paradoxes. We suggest a multiperiod game instead, where the flow of information into and out of prices is explicitly modeled. In our game Nash equilibria (N.E.) (1) generalize Walrasian equilibria to asymmetric information; (2) exist generically; (3) eliminate pure speculation; (4) allow prices to reveal information and markets to become more efficient over time; (5) are consistent with the weak efficient markets hypothesis that tracking past prices is not profitable; (6) yet always lead to higher utility for better informed agents (such as experts). Throughout the paper we use one concrete game. In the last section we prove that there are a broad range of games that would have the same properties.

See CFP 686