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.
We show that a firm can increase expected profits by undertaking the additional expense of paying unemployment compensation to the workers it lays off, if they are risk averse. When this argument is applied to the implicit contract models it makes the involuntary unemployment derived there disappear, where by involuntary unemployment we mean a situation in which one worker has a job at a wage w and another worker who is known to be productively identical and willing to take on the job at a lower wage h cannot find a job.
We introduce into our model asymmetric information between sectors of the economy. Each agent knows the state of his own firm but not that of others. We suppose also that workers have specific skills which are conformable to some, but not all, firms in the economy. In this model we reestablish the phenomenon of involuntary unemployment in a general implicit contracts equilibrium in which the proportion of layoffs, the “stabilized” wage, and the severance payments are endogenously determined. Moreover, we show that the presence of involuntary unemployment is a signal that there is too little output in the most productive sectors of the economy, thereby restoring the link between underproduction and involuntary unemployment missing in the implicit contracts literature. Finally we ask how large should be the severance payment a profit maximizing firm gives to each worker from a branch it shuts down, when there is uncertainty about what jobs those workers will find. We prove that the rational expected-profit-maximizing firm will offer a contract which provides severance compensation so generous that on average the workers dismissed by the closing of a plant can expect to be better off than if they had been retained, in the case that they have decreasing absolute risk aversion.
Under the assumption of common priors, if the information partitions of two agents are finite, then simply by communicating back and forth and revising their posteriors the two agents will converge to a common equilibrium posterior, even though they may base their posteriors on quite different information. Furthermore, given any integer, n, one can construct an example in which the revision process not only takes n steps to converge, but no evident revision occurs — for (n – 1) steps both agents repeat the same conflicting posteriors — until the last step when the two agents decide to agree. Common knowledge of each other’s posterior does not necessarily lead agents to the posterior they would have agreed upon had information been directly exchanged. On the other hand, the examples that are characterized by a discrepancy between the direct and indirect communication equilibrium are rare: with probability 1, the revision process constructed here leads the two agents in one step to the direct communication equilibrium.
If two people have different probability assessments about the realization of an uncertain event, they can design a contingent agreement such as a bet or gamble that offers each of them positive expected value. Yet, in the process of formulating this kind of agreement, information about the basis for each person’s probabilities may be indirectly revealed to the other. The very willingness to accept a proposed bet conveys information. This paper models a process by which private, asymmetrically-held information is progressively unveiled as a possible contingent agreement is discussed. If the two parties share priors and their information partitions are common knowledge, simple discussion of the acceptability of any proposed bet is shown to reveal enough about their private information to render the bet unacceptable.
We show that a firm can increase expected profits by undertaking the additional expense of paying unemployment compensation to the workers it lays off, if they are risk averse. When this argument is applied to the implicit contract models it makes the involuntary unemployment derived there disappear, where by involuntary unemployment we mean a situation in which one worker has a job at a wage w and another worker who is known to be productively identical and willing to take on the job at a lower wage h cannot find a job.
We introduce into our model asymmetric information between sectors of the economy. Each agent knows the state of his own firm but not that of others. We suppose also that workers have specific skills which are conformable to some, but not all, firms in the economy. In this model we reestablish the phenomenon of involuntary unemployment in a general implicit contracts equilibrium in which the proportion of layoffs, the “stabilized” wage, and the severance payments are endogenously determined. Moreover, we show that the presence of involuntary unemployment is a signal that there is too little output in the most productive sectors of the economy, thereby restoring the link between underproduction and involuntary unemployment missing in the implicit contracts literature. Finally we ask how large should be the severance payment a profit maximizing firm gives to each worker from a branch it shuts down, when there is uncertainty about what jobs those workers will find. We prove that the rational expected-profit-maximizing firm will offer a contract which provides severance compensation so generous that on average the workers dismissed by the closing of a plant can expect to be better off than if they had been retained, in the case that they have decreasing absolute risk aversion.