Book contents
- Frontmatter
- Contents
- Preface to the Second Edition
- 1 Equilibrium, Efficiency, and Asymmetric Information
- 2 Basic Models and Tools
- 3 Hidden Action
- 4 Corporate Governance
- 5 Hidden Characteristics
- 6 Auctions
- 7 Voting and Preference Revelation
- 8 Public Goods and Preference Revelation
- 9 Matching
- 10 General Competitive Equilibrium
- References
- Author Index
- Subject Index
10 - General Competitive Equilibrium
- Frontmatter
- Contents
- Preface to the Second Edition
- 1 Equilibrium, Efficiency, and Asymmetric Information
- 2 Basic Models and Tools
- 3 Hidden Action
- 4 Corporate Governance
- 5 Hidden Characteristics
- 6 Auctions
- 7 Voting and Preference Revelation
- 8 Public Goods and Preference Revelation
- 9 Matching
- 10 General Competitive Equilibrium
- References
- Author Index
- Subject Index
Summary
This chapter examines a hidden characteristic problem of great significance: We take an economy-wide perspective and ask if there is a mechanism that will elicit private information about individual preferences and firm production recipes in a way that allows an efficient allocation of private goods and services to be identified and implemented. We assume away all other hidden information problems. In particular, every consumer is assumed to know the quality of every firm's output, every employer knows the abilities of every prospective employee, every lender knows the probability of default of every creditor, and so on. Every manager can be relied on to maximize profit. In fact there is no shirking by anyone.
The economy still has an impressive challenge—to induce truthful revelation of the remaining hidden information, specifically the preferences and production functions. In fact, three of the five sections even assume away this hidden information problem, highlighting instead the transmission of information. Recall that an outcome is efficient if there is no other arrangement of production and consumption activities that makes one person better off without lowering the utility of anyone else. Identification of an efficient outcome would seem to require an enormous amount of information about all of the private characteristics. Therefore, even with most of the hidden information problems assumed away, identification of an efficient outcome by the market system is a remarkable accomplishment. Marginal social cost pricing is the key.
- Type
- Chapter
- Information
- IncentivesMotivation and the Economics of Information, pp. 513 - 560Publisher: Cambridge University PressPrint publication year: 2006