Economic Theory

, Volume 13, Issue 3, pp 603-628

First online:

Asymmetric information in a competitive market game: Reexamining the implications of rational expectations

  • Matthew O. JacksonAffiliated withDivision of Humanities and Social Sciences 228-77, Caltech, Pasadena, CA 91125, USA (e-mail:
  • , James PeckAffiliated withDepartment of Economics, The Ohio State University, 1945 N. High Street, Columbus, OH 43210-1172, USA (e-mail:

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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.

Keywords and Phrases: Market game Excess volatility Rational expectations Asymmetric information Information acquisition. JEL Classification Numbers: G12 G14 D84.