The Economics of Uncertainty and Information

312 Pages·1989·11.762 MB·English

by  Jean-Jacques Laffont

j&sgæuu . ; li :•;
\MYi ••*••'•:-:*: ' ■'•'••' •
_■ i g v- ■î'.s- • ■«.,
|gi|pÉg ' ■ “ '
^^^^SH^^jBït^îëlaîSgüSgnlSit-rnînHviÜ i>K S55-Ü:.l»^jgisrr» • •"• - •-•••••- ' - : -i : ; i t; il': : ': -.: -r • ? . iu~;:; lia; : ”U UlIS
| au: •'- 183 &tggg| • 1 : '
jiliüiïir! IStjdnUiUUUHUSWtSü'tHJîHH^aaSîlü^iî.
Üi:
:ÎHhH*H5î?Ht *h; :V- •» •* « fj ■} * m&mm
■' jiK5T*aaa»î5oBr.n*tn: uî: iH Hué «H: H ■•'•'•( « :
ir^iusîii '
J :t ru Kë-H: *î:: *‘i IPIplllÆÙi'lidHi'iSp ::
*?*î?.n: iü-'sÎMSHi2tîH;uî::i
SîifU* i “HS«?K* SM t$iu W*tui*•.;;;;
.. . ’ -KjEs : _ .
55SBSs$9llK
inl^iijlSîgP ISb:\ilï:
"' .;• ■; " rfe r,-^'_ ;.i.:i;seifü i-è'ç^P
? =î :l^ :!:IÜ i]
■ .. ;.: •. 111%? Sgte •• ü'■* ! }W »1 ni'. • ÜU
•lUUîi :i»üiune fTUuè
THOMAS |. BATA LI BRARY
TRENT UNIVERSITY
Digitized by the Internet Archive
in 2019 with funding from
Kahle/Austin Foundation
https://archive.org/details/economicsofuncerOOOOIaff

The Economics of Uncertainty and Information

The Economics of Uncertainty and Information
Jean-Jacques Laffont
translated by
John P. Bonin and Hélène Bonin
The MIT Press
Cambridge, Massachusetts
London, England
f
Second printing, 1990
© 1989 The Massachusetts Institute of Technology
Published in France under the title
Cours de théorie microeconomique. II. Economie de l'incertain et de l'information by
Economica, Paris, 1986
© 1986 Jean-Jacques Laffont
All rights reserved. No part of this book may be reproduced in any form by any electronic
or mechanical means (including photocopying, recording, or information storage and
retrieval) without permission in writing from the publisher.
This book was set in Times Roman by Asco Trade Typesetting Ltd., Hong Kong, and
printed and bound by Halliday Lithograph in the United States of America.
Library of Congress Cataloging-in-Publication Data
Laffont, Jean-Jacques, 1947—
[Cours de théorie microéconomique. Economie de l’incertain et de l’information.
English]
The economics of uncertainty and information/Jean-Jacques Laffont; translated by
John P. Bonin and Hélène Bonin.
p. cm.
Translation of: Cours de théorie microéconomique. Vol. 2. Economie de l’incertain
et de l’information.
Includes index.
ISBN 0-262-12136-0
[.Microeconomics. 2. Uncertainty. I. Title.
HB173.L2352513 1989
338.5—dcl9 88-13250
CIP
Contents
Preface ix
Mathematical Notation and Definitions xi
Introduction 1
1 Individual Behavior under Uncertainty 6
1.1 The Expected Utility Hypothesis 6
1.2 The Theory of von Neumann and Morgenstern 9
1.3 Nonprobabilistic Consequences 14
Suggested Readings 18
References 18
2 Measuring Risk Aversion and Risk 19
2.1 Measures of Risk Aversion 19
2.2 Measures of Risk 24
2.3* The Maximin Criterion 30
2.4* Proof of Pratt’s Theorem 31
2.5* Stochastic Dominance 32
2.6* Generalization of the Expected Utility Hypothesis 33
2.7* Risk Aversion with Many Goods 35
Suggested Readings 38
References 38
3 Certainty Equivalence 40
3.1 Certainty Equivalence 40
3.2 First-Order Certainty Equivalence 44
3.3 A More General Notion of First-Order Equivalence 50
3.4* The Irreversibility Effect 52
3.5* The Arrow-Lind Theorem 53
Suggested Readings 54
References ^4
4 Information Structures 55
4.1 Prior Information 55
Contents
VI
4.2 Information Structure without Noise 56
4.3 Information Structure with Noise 62
4.4 The Demand for Information 66
4.5* Proof of Blackwell’s Theorem 68
Suggested Readings 68
References 69
5 The Theory of Contingent Markets 70
5.1 A New Interpretation of the Edgeworth Box 70
5.2 Generalization 75
5.3 Different Information Structures 77
5.4 The Value of Information 79
Suggested Readings 81
References 81
6 Equilibria with Perfect Foresight in Incomplete
Markets 82
6.1 Back to the Arrow-Debreu Equilibrium 82
6.2 The Equilibrium with Perfect Foresight 84
6.3 The Normative Analysis of Equilibria with Perfect
Foresight 88
6.4 Existence of Equilibrium 94
6.5 On the Incompleteness of Markets 96
6.6* Law and Economics 99
6.7* Sunspot Equilibria 99
Suggested Readings 101
References 101
7 The Stock Market 103
7.1 Competitive Equilibrium in the Stock Market 103
7.2 Several Special Cases 109
7.3 The Modigliani-Miller Theorem 115
7.4 Concluding Remarks 116
7.5* The Capital Asset Pricing Model 117