The Value of Information in Risky Markets: Discussion

Abstract

The three papers in this session illustrate well the breadth of the challenge posed to economists by the study of risk and information. The theoretical research is filled with paradoxes, and we are just now understanding existence, uniqueness, and stability of equilibria in these models. Research in these areas is quite difficult but also exciting; in many respects, information is what economic theory is all about once the fiction of complete ArrowDebreu markets is dropped. The applied economist faces additional problems of practical definition, measurement, and data. Thus, empirical work is lagging significantly behind the theory. The authors of these papers are to be applauded for collectively demonstrating both how far we have come and how much work there remains for the rest of us. Buccola's paper addresses fundamental issues of the efficiency of decentralized markets under risk. He makes a good point that for full efficiency to hold, two conditions are required: markets must exhibit weak informational efficiency, and the equilibrium price must be given by the competitive equilibrium. I focus on the second condition. With durable assets, the relevant concept is an intertemporal competitive equilibrium path. We know from the macroeconomic and capital theory literatures that it is perfectly possible for markets to incorporate available information and for spot markets to clear at each date, yet for the economy to be on an inefficient path that does not converge to equilibrium in the long run. The dynamic competitive equilibrium is even harder to compute than the static one; this undermines the relevance of laboratory experiments. This is closely related to the idea of a speculative bubble in which an asset's price does not equal its market fundamental and diverges farther from it over time. Rational expectations does not necessarily rule this out (Diba and Grossman, Blanchard and Watson). Where it does, it eliminates this ki d of inefficiency by assuming that agents always act so that transversality conditions hold. I can think of no very believable reason for this continuously to be so. Has the market for agricultural land, a market not considered by Buccola, been subject recently to such a bubble and crash?