Abstract: Based on the rational expectation framework and from the perspective of market microstructure,the paper analyzes the effect of price limit on trading mechanism of stock market.The paper puts the tempestuous increasing and decreasing of stock price down to the shock induced by information and trading volume and believes that price limit has effect on the equivalent value of investor and results in transfer of endowments of investor when price is high or low.The paper presents the condition under which price limit is Pareto efficient.

Key words: price limit, expected utility, transfer of endowment