wedrifid comments on The Second Best - Less Wrong

13 Post author: Wei_Dai 26 July 2009 10:58PM

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Comment author: conchis 27 July 2009 01:40:04AM *  1 point [-]

Unfortunately, I think this is one of those instances where wikipedia can lead one (slightly) astray. Greenwald-Stiglitz is not quite as far-reaching as all that. (Though it is pretty far-reaching, hence my initial comment being a nitpick.) Contra wikipedia, Greenwald-Stiglitz applies to two specific violations of perfect competition: information asymmetry and incomplete risk markets. These do not exhaust the space of possible violations of perfect competition, hence, there may be violations of perfect competition that nonetheless allow Pareto efficiency (at least in theory; in practice, information asymmetry and incomplete risk markets are pretty pervasive).

One (unrealistic) example of a non-perfectly competitive economy that is nonetheless pareto efficient is a centrally-planned economy where the government (magically) imposes exactly the same set of prices/quantities as would naturally arise in the perfectly competitive economy. Another is if two externalities (magically) exactly offset each other. Another is if a government imposes a tax that exactly offsets an externality.

Again, I do not claim that these are especially empirically relevant. My point was a fairly pedantic technical one.

ETA: your wikipedia link has a colon at the end that shouldn't be there.

Comment author: wedrifid 28 July 2009 02:25:56AM *  1 point [-]

Do you happen to have any references to back up your claims?

Not that I particularly care about Greenwald-Stiglitz. But in the time taken to make your point and dismiss it as irrelevant you could prevent some future helpless sap from the misfortune of being lead slightly astray!

Unfortunately, I think this is one of those instances where wikipedia can lead one (slightly) astray.

Come to think of it, I'm going to have to use this retort some day:

No, you're wrong. Wikipedia says "...."

Fixed.

Comment author: conchis 29 July 2009 01:22:10PM *  0 points [-]

Well, the paper itself (referenced in the wikipedia page Wei referred to) is obviously the definitive source. The abstract reads:

This paper presents a simple, general framework for analyzing externalities in economies with incomplete markets and imperfect information. ... The approach indicates that ... equilibria in situations of imperfect information are rarely constrained Pareto optima.

All the other summaries I've ever seen also describe the result in similarly narrow terms, e.g.:

  • the wikipedia entry on Joe Stiglitz, which states that

    Stiglitz has shown (together with Bruce Greenwald) that "whenever markets are incomplete and /or information is imperfect (which are true in virtually all economies), even competitive market allocation is not constrained Pareto efficient".

  • the paper by Dixit that comes up as the first google hit for "Greenwald Stiglitz", which states that:

    It establishes a conceptual parallel between asymmetric information and technological externalities, andshows that a competitive equilibrium of an economy with asymmetric information is generically not even constrained Pareto efficient.

  • subsequent papers by Stiglitz himself, e.g. The Invisible Hand and Welfare Economics, which describes the result in almost identical terms.

I expect that the statement Wei linked to is just a typo where someone accidentally substituted "perfect competition" for "perfect information".

ETA: I actually would have edited the wiki entry myself; but I didn't want to create the impression I'd done so just to back up my claims.

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