Spence’s model of Signaling in the job market

The Arrow-Debreu model of a perfectly competitive economy is based on the crucial assumption of complete markets, that is, the assumption that there exists a market (i.e. a price) for each good, for each location, for each future date and for each possible state of nature. The presence of a complete set of forward markets for future contingent delivery eliminates uncertainty since it allows complete insurance. It is sometimes claimed that the properties of the Arrow-Debreu model (in particular, the results that a competitive equilibrium exists and that all competitive equilibria are Pareto efficient) depend crucially on the assumption of perfect information. This is not correct: it was proved by Radner in 1968 that as long as the assumption of complete markets is retained the presence of asymmetric information (some agents are more informed than others) is not an obstacle to the proof that a competitive equilibrium exists and is Pareto efficient.