The Existence of Informationally Efficient Markets When Individuals Are Rational∗

A rational-expectations equilibrium with positive demand for financial information does exist under fully revealing asset price—contrary to a wide-held conjecture. Generalizing the common additive signal-return model with CARA utility to the family of distributions with moment generating functions, this paper shows that individual investors endowed with an average portfolio demand information in equilibrium if they can adjust portfolio size. More information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off. Under fully revealing price, information market equilibria both with and without information acquisition are Pareto efficient. JEL D82, D83, G14 ∗I thank Vince Crawford, Mark Machina, Joel Sobel, Ross Starr, Joel Watson and seminar participants at UCSD for insightful suggestions. I owe the inspiration to Walter Novaes, whose casual remarks on CARA and moment generating functions at a meeting in Rio de Janeiro made me first ponder this approach. Any remaining mistakes are mine. A previous version of this paper circulated under the title “Demand for financial information under fully revealing asset price.” ¶[email protected] (www.econ.ucsd.edu/muendler). University of California San Diego (UCSD), Dept. of Economics 0508, 9500 Gilman Dr., La Jolla, CA 92093-0508, USA