Information, efficiency, and the core of an economy

Summary

The meaning of exchange efficiency is examined in the context of an economy in which agents differ in their endowments of information. Definitions of efficiency, and of the core, are proposed which emphasize the role of communication. Opportunities for insurance are preserved by restricting communication, or in a market system by restricting insider trading, prior to the pooling of information for the purposes of production.

My subject is an economy in which different agents have different information. I propose a definition of exchange efficiency and I characterize the efficient allocations. I then examine an analogous definition of the core and I demonstrate that the core is not empty if the usual regularity conditions are satisfied. An example, however, illustrates that a market process may fail to yield an efficient allocation. In fact, in this example the market allocation is not even individually rational for the agents. Also, in this example the core is empty if there are opportunities for communication which disrupt arrangements for mutual insurance.

This study was supported in part by the National Science Foundation, Grant SOC76-11446-A01, at the Institute for Mathematical Studies in the Social Sciences, and in part by the Energy Research and Development Administration, Contract E(04-3)-326 PA # 18, at the Systems Optimization Laboratory, Stanford University.

For discussions and suggestions I am indebted to Robert Aumann, Jonathan Cave, Bengt Holmström, Takao Kobayashi, David Kreps, and John Riley. Kobayashi [3] presents extensions of this work.