Endogenous probabilities and the information revealed by prices

This paper studies the revelation of private information by equilibrium pri ces when conditional probabilities are endogenous. The analysis is confined to one-period, one-good exchange economies with incomplete asset markets. It is shown that for a generic set of economies parameterized by endowment vectors both the set of fully revealing and set of non-revealing (partially revealing) rational expectations equilibria (REE) are smooth manifolds of strictly positive dimension. However, the dimension of the manifold of full y revealing REB is strictly larger than the dimension of the manifold of no n-revealing (partially revealing) REE. Moreover, the same result holds for the set of consumption allocations associated with the set of fully reveali ng REE and non-revealing (partially revealing) REE. Hence, even if conditio nal probabilities are endogenous, informational efficiency is still the rul e. (C) 2001 Elsevier Science B.V. All rights reserved.