Perfect Competition in Differential Information Economies: Consistency of Incentive Compatibility and Efficiency ∗ Yeneng Sun † and Nicholas C. Yannelis ‡ Abstract The idea of perfect competition for an economy with differential information is formal- ized via an idiosyncratic signal process in which the private signals of almost every individual agent can influence only a negligible group of agents, and the individual agents’ relevant signals are essentially pairwise independent conditioned on the true states of nature. The existence of incentive compatible, individually rational and Pareto efficient allocations is shown for such a perfectly competitive differential information economy with or without “common values” via simple measure-theoretic methods. Thus, the conflict between in- centive compatibility and Pareto efficiency is resolved exactly, and its asymptotic version derived for a sequence of large, but finite private information economies. ∗ This work was initiated in October 2003 while Yeneng Sun was visiting the University of Illinois at Urbana- Champaign. This version was finished in May 2004. † Institute for Mathematical Sciences, National University of Singapore, 3 Prince George’s Park, Singapore 118402; also Department of Mathematics, National University of Singapore, 2 Science Drive 2, Singapore 117543. e-mail: matsuny@nus.edu.sg ‡ Department of Economics, University of Illinois at Urbana-Champaign, Champaign, IL 61820. e-mail: nyan- neli@uiuc.edu