1976 Articles

Information and Competitive Price Systems

Stiglitz, Joseph E.; Grossman, Sanford J.

Although the price system is conventionally praised as an efficient way of transmitting the information required to arrive at a Pareto optimal allocation of resources, the context in which the price system is usually discussed is not one in which the informational efficiency of the price system can be properly evaluated. Questions of how the price system leads the economy to respond to a new situation, how it conveys information from informed individuals to uninformed individuals, and how it aggregates the different information of different individuals, are never directly attacked. In a series of papers authors have attempted to remedy this deficiency. It is the object of this article to draw attention to some of the more fundamental implications of authors approach and to use it to assess the meaning and validity of the efficient market hypothesis. Although the discussion of authors will accordingly focus on the capital market, the kind of analysis developed here is applicable to any competitive market subject to random shocks.