dc.description.abstract | " The paper is organized as follows. In Section 2 the notion of an informationally consistent price function is developed and a class of imperfect information models is described. Spence's labor market model and the Rothschild/Stiglitz insurance model are shown to be members of this class. Section 3 considers the existence of ""informationally consistent"" Walrasian equilibrium price functions. By this is meant a schedule of prices, conditional upon the level of the signal, with the property that when sellers acting as price takers choose their maximizing levels of the signal, buyers find that their quality forecasts are correct. Given the assumptions of the model it is shown that there exists a differentiable family of such functions.2 In addition, it is shown that all informationally consistent price functions must belong to this family. Since the proofs for this section are the most difficult, some readers may prefer to jump from the description of Theorem 1 to Section 4. There it is established that no members of the above family are noncooperative Nash equilibria. It is demonstrated that for any informationally consistent price function, there is always an alternative offer at the lowest quality level (e.g., lowest skill level which, if introduced by a single agent, yields the latter increased profits.3 Conditions are also established under which there are new profitable offers at higher quality levels. Finally, in Section 5, two alternative noncooperative equilibrium concepts are examined. The notion central to both is that if buyers act as Nash competitors, ignoring possible responses of other buyers, the actual and anticipated outcomes of their actions will continually diverge. Given such divergence, it seems reasonable to suppose that buyers eventually learn to predict how other buyers will react. Actions are then taken only if profitable after the predicted reactions." | |