Strategic foundations of efficient rational expectations (Q7008422)

In this paper, the authors study an economy with traders whose payoffs are quasilinear and whose private signals are informative about an unobserved state parameter. The limit economy has infinitely many traders partitioned into a finite set of symmetry classes called types. The model and the replicas are presented in Section 2. Section 3 studies the efficient allocation. Section 4 studies rational expectations equilibrium (REE), establishing that monotonicity of the efficient allocation ensures existence and uniqueness of a fully revealing REE. Section 5 proves that the efficient allocation is attainable if and only if it is monotone. Sections 7 and 8 present positive results, showing that if monotonicity of the efficient allocation is satisfied then auctions yield strategic foundations for the REE, and further, the outcomes of large-but-finite auctions approximate the fully revealing REE. The Appendices have the proofs of the statements.