A theory of price and quantity adjustments, in response to stochastic changes in demand, is developed for competitive mark ets. The level of demand is observable, but product quality is not. I t is shown that the higher the serial correlation of demand, the more rigid are prices and the greater...

Are stock prices determined by fundamentals or can 'bubbles'exist? An important issue in this debate concerns the circumstances in which deviations from fundamentals are consistent with rational behavior. When there is asymmetric information between investors and portfolio managers, portfolio...

In an overlapping generations economy with (incomplete) financial markets but no intermediaries, there is underinvestment in safe assets. In an economy with intermediaries and no financial markets, accumulating reserves of save assets allows returns to be smoothed, nondiversifiable risk to be...

Market discipline for financial institutions can be imposed not only from the liability side, as has often been stressed in the literature on the use of subordinated debt, but also from the asset side. This will be particularly true if good lending opportunities are in short supply, so that...

A welfare analysis of a simple noisy rational expectations model is carried out. It is shown that the more information prices convey, the worse off everybody is. However, the equilibrium where everybody is uninformed may not be Pareto optimal: imposing a tax on information gathering which...

There is often a reliability problem when information is sold since anyone can claim to have superior knowledge. Optimal strategies which allow the seller to overcome this problem are considered in the context of a standard one-period two-asset model. It is shown that when the seller’s risk...