Competitive equilibrium under asymmetric information
Abstract
This paper studies the existence of a competitive market equilibrium under asymmetric information. There are two agents involved in the trading of the risky assets: an “informed” trader and an “ordinary” trader. The market is competitive and the ordinary agent can infer the insider information from the risky assets price dynamics. The insider information is considered to be the total supply of the risky assets. The definition of market equilibrium is based on the law of supply-demand as described by a Rational Expectations Equilibrium of the Grossman and Stiglitz (1980) model. We show that equilibrium can be attained by linear dynamics of an admissible price process of the risky assets for a given linear supply dynamics.
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