Strongly Rational Expectations Equilibria,Endogenous Acquisition of Information and the Grossman–Stiglitz Paradox

This paper analyzes conditions for strong rationality of the equilibrium in a linear/Gaussian model of a competitive commodity market, where firms are differentially informed about costs of production and the precision of private information is endogenously acquired. A Rational Expectations Equilibrium is said to be Strongly Rational, or eductively Stable, (SREE) when it is the unique rationalizable outcome. A locally SREE exists when the informativeness of the price is below a threshold that is increasing in the informativeness of private information and the elasticity of marginal cost of information acquisition. In the spirit of the Grossman Stiglitz paradox, informativeness of the SREE price is bounded. In the case with constant marginal costs, we characterize the set of rationalizable information precisions. Furthermore, a SREE requires that marginal costs of information are neither too low nor too large. Exogenous public information always favors stability.