Prices and knowledge: A market-process perspective

Equilibrium prices and information 39the smaller the market weight of his transaction demand and theless he has to share the informational advantage with others, thegreater his chance to trade at a price which is false in the light ofhis beliefs and to re-trade at a profit if his beliefs turn out to becorrect.(ibid.: 393–4)In a similar vein, Radner (1979:656), commenting on the type ofparadox that leads Grossman and Stiglitz to assert the non-existenceof informationally efficient equilibrium, says that ‘to examine thisquestion more carefully one needs a model that reflects the dynamicsof market adjustment and price formation’.In the example above of a risky security with an uncertainreturn, assuming the stock fixed, any information purchased bysome (informed) traders about, for example, a higher return wasconveyed to other (uninformed) traders, for free, through thechange in the price of the security. As the model confines itself toequilibrium situations, the price of the security is assumed to jumpinstantaneously to its new, higher level. This, as Streit argues, doesnot allow the informed traders to profit from their expensiveinformation; not a realistic result. It also leaves unexplained theprocess by which the new information gets incorporated into theprice: one would expect the price increase to occur as aconsequence of the profitable trading of the informed individuals.(The size of the profits they make before other traders becomeaware of the opportunity will depend, of course, on the tradingstrategy they adopt.) This has led to the comment thatGrossman’s proposition does not seem to capture the original ideathat individuals react to their individual informations [sic] andtherefore the equilibrium price reflects some aggregate of [them].Instead, it must be presumed that the ‘auctioneer’ somehowhappens to know the vector [of individual informations], in whichcase perfect aggregation of information through the price inducesagents to disregard their individual information and therefore isconsistent with market clearing.(Hellwig 1980:478; emphasis in original)Furthermore, in Grossman and Stiglitz’s setting it is not clear of whatuse the information on the higher returns can be to uninformed tradersif they have to derive it from a price that has already fully discounted