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Information and Market Equilibrium

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  • Richard E. Kihlstrom
  • Leonard J. Mirman

Abstract

Under the assumption of complete markets, a fundamental result of competitive market analysis (whether for speculative or commodity markets) is that prices contain all information necessary for optimal decisionmaking by individual economic units. The role that prices play in disseminating information is analyzed in the context of two different models. First an economy under uncertainty without complete markets is analyzed. Conditions are specified under which equilibrium prices reflect (or transmit) all available information to market observers. It is shown that uninformed market observers can deduce inside information about the environment from the change in the equilibrium price when there is a one-to-one correspondence between the market price and the useful part of the information received. For a special case, sufficient conditions for invertibility are derived. Then a Bayesian hypothesis is used to study the price expectations formed on the basis of information obtained about the economy from observations of past market prices. The Bayesian price expectations are shown to converge, as price observations accumulate, to the expectations of an observer who knows the true structure of the economy.

Suggested Citation

  • Richard E. Kihlstrom & Leonard J. Mirman, 1975. "Information and Market Equilibrium," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 357-376, Spring.
    • Handle: RePEc:rje:bellje:v:6:y:1975:i:spring:p:357-376
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    Citations

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    Cited by:

    1. Nikita Kuksin, 2007. "General Equilibrium: Arbitrage and Information," CERT Discussion Papers 0701, Centre for Economic Reform and Transformation, Heriot Watt University.
    2. Brice Corgnet & Mark DeSantis & David Porter, 2020. "Information Aggregation and the Cognitive Make-up of Traders," Working Papers 20-18, Chapman University, Economic Science Institute.
    3. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    4. McNulty, Mark S., 1985. "Information usage in the formation of price expectations: theory and econometric tests," ISU General Staff Papers 1985010108000013085, Iowa State University, Department of Economics.
    5. Douglas MacKinnon & Martin Pavlovič, 2020. "A Bayesian analysis of hop price fluctuations," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 66(12), pages 519-526.
    6. Garcia, René, 1986. "La théorie économique de l’information : exposé synthétique de la littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 62(1), pages 88-109, mars.
    7. Avdis, Efstathios, 2016. "Information tradeoffs in dynamic financial markets," Journal of Financial Economics, Elsevier, vol. 122(3), pages 568-584.
    8. John Benjamin & Chris de la Torre & Jim Musumeci, 1998. "Rationales for Real Estate Leasing versus Owning," Journal of Real Estate Research, American Real Estate Society, vol. 15(3), pages 223-238.
    9. Ouardighi, Fouad El & Tapiero, Charles S., 1998. "Quality and the diffusion of innovations," European Journal of Operational Research, Elsevier, vol. 106(1), pages 31-38, April.
    10. Catherine Rouzaud, 1983. "Anticipations rationnelles et information révélée par les prix : une introduction," Revue Économique, Programme National Persée, vol. 34(6), pages 1116-1144.
    11. Lennox, Clive & Li, Bing, 2014. "Accounting misstatements following lawsuits against auditors," Journal of Accounting and Economics, Elsevier, vol. 57(1), pages 58-75.
    12. Corgnet, Brice & DeSantis, Mark & Porter, David, 2021. "Information aggregation and the cognitive make-up of market participants," European Economic Review, Elsevier, vol. 133(C).
    13. Lawrence R. Glosten, 1978. "A 'Trade Out of Equilibrium' Model of the Stock Market," Discussion Papers 309, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    14. Berliant, Marcus & De, Sankar, 1998. "On the revelation of private information in stock market economies," Journal of Mathematical Economics, Elsevier, vol. 30(2), pages 241-256, September.
    15. Jean-Claude Bosch, 1983. "Speculation And The Market For Recommendations," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 6(2), pages 103-113, June.

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