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When traders come to a market with different information about the items to be traded, the resulting market prices may reveal to some traders information originally available only to others.The possibility for such inferences rests upon traders having "models" or "expectations" of how equilibrium prices are related to initial information.This relationship is endogenous, which motivates the term "rational expectations equilibrium."This paper shows that, in a particular model of asset trading, if the number of alternative states of initial information is finite then, generically, rational expectations equilibria exist that reveal to all traders all of their initial information. INTRODUCTION1WHEN TRADERS COME to a market with different information about the items to be traded, the resulting market prices may reveal to some traders something about the information available to other traders.This phenomenon might be important in the case of assets whose eventual values or utilities are not perfectly known to all traders at the time of purchase, as in the trading of land with uncertain quantities of mineral deposits, or in the trading of common stocks.A thorough theoretical analysis of this situation probably requires a more detailed specification of the trading mechanism than is usual in general equilibrium analysis.Nevertheless, it is tempting to try to obtain results that are as independent as possible of the specifics of the trading mechanism, by using some suitable concept of equilibrium.The possibility for one trader to make inferences from market prices about the information possessed by other traders rests upon his having a "model" or "expectations" of how equilibrium prices are determined, i.e., how equilibrium prices are related to the information initially possessed by the various traders.But this relationship is endogenous to the market system, and if traders have any opportunity to compare the results of the operation of the market with their own models, then a suitable equilibrium concept would require that their models not be obviously controverted by their observations of the market.This motivates the term "rational expectations equilibrium."The particular rational expectations equilibrium that one would obtain depends upon the traders' models or expectations of the relationship between traders' 1 I am grateful to Jerry Green, Leonid Hurwicz, James Jordan, and David Kreps for very helpful discussions of the problems treated in this paper.
Roy Radner (Tue,) studied this question.