The Unique Informational Efficiency of the Competitive Mechanism

Abstract

The purpose of this paper is to investigate the informational requirements of resource allocation processes for convex production economies. First, we establish a lower bound of the message space of an informationally decentralized mechanism that realizes Pareto efficient allocations over the class of classical production economies. Then, it is shown that this lower bound is exactly the size of the message space of the competitive (Walrasian)mechanism, and thus the competitive mechanism is informationally efficient for general neoclassical production economies in the sense that it uses the smallest message space among the class of resource allocation processes that are informationally decentralized and realize Pareto optimal allocations. Further, it is shown that the competitive mechanism is the unique informationally efficient decentralized mechanism that realizes Pareto e±cient and individually rational allocations. Therefore, any other economic institution that achieves Pareto efficient and individually rational allocations must use a larger message space than the competitive mechanism. The results obtained in the paper shed light on the socialist controversy between Mises-Hayek and Lange-Lerner.