Informed trading undermines the existence of competitive equilibrium

Evidence

When there is no noise, prices convey all information, and there is no incentive to purchase information. But if everybody is uninformed, it clearly pays some individual to become informed. Thus, there does not exist a competitive equilibrium. — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 769

Categorization

• DEFINE: Tightly summarizes the Grossman-Stiglitz paradox that prices conveying all information makes information acquisition unremunerative, breaking equilibrium.
• XREF: connects to: Competitive speculation wipes out predictable price moves — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 279; The efficient-market hypothesis has survived thousands of studies without consensus — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 751; Mutually beneficial transactions can fail when payoffs are common knowledge — Diego Gambetta, Trust - Making and Breaking Cooperative…, 892

Broader Connections

• Mutually beneficial transactions can fail when payoffs are common knowledge #complicates (0.72) — Diego Gambetta, Trust - Making and Breaking Cooperative…, 892