Efficient Use of Information and Social Value of Information
This paper analyzes equilibrium and welfare for a tractable class of economies (games) that have externalities, strategic complementarity or substitutability, and heterogeneous information. First, we characterize the equilibrium use of information: complementarity heightens the sensitivity of equili...
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| Published in: | Econometrica Vol. 75; no. 4; pp. 1103 - 1142 |
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| Main Authors: | , |
| Format: | Journal Article |
| Language: | English |
| Published: |
Oxford, UK and Boston, USA
Blackwell Publishing Ltd
01-07-2007
Econometric Society Blackwell |
| Subjects: | |
| Online Access: | Get full text |
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| Summary: | This paper analyzes equilibrium and welfare for a tractable class of economies (games) that have externalities, strategic complementarity or substitutability, and heterogeneous information. First, we characterize the equilibrium use of information: complementarity heightens the sensitivity of equilibrium actions to public information, raising aggregate volatility, whereas substitutability heightens the sensitivity to private information, raising cross-sectional dispersion. Next, we define and characterize an efficiency benchmark designed to address whether the equilibrium use of information is optimal from a social perspective; the efficient use of information reflects the social value of aligning choices across agents. Finally, we examine the comparative statics of equilibrium welfare with respect to the information structure; the social value of information is best understood by classifying economies according to the inefficiency, if any, in the equilibrium use of information. We conclude with a few applications, including production externalities, beauty contests, business cycles, and large Cournot and Bertrand games. |
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| Bibliography: | istex:A6C1D2D56DE7C5A66A2F98F28031646FB1971AEA ark:/67375/WNG-036QSVD0-2 ArticleID:ECTA783 Earlier versions were titled “Social Value of Coordination and Information” and “Efficient Use of Information and Welfare Analysis with Complementarities and Asymmetric Information.” We are grateful to a co‐editor and three referees for their extensive feedback. For useful comments, we thank Daron Acemoglu, Abhijit Banerjee, Gadi Barlevy, Robert Barro, Olivier Blanchard, Marco Bassetto, V. V. Chari, Eddie Dekel, Christian Hellwig, Patrick Kehoe, David Levine, Kiminori Matsuyama, Stephen Morris, Andrew Postlewaite, Thomas Sargent, Hyun Song Shin, Xavier Vives, Iván Werning, and seminar participants at Chicago, Harvard, MIT, Michigan, Northwestern, Penn, Rochester, Athens University of Economics and Business, Bocconi University, European University Institute, Universitat Pompeu Fabra, University Federico II, Catholic University of Milan, the Federal Reserve Banks of Chicago and Minneapolis, the Bank of Italy, the 2005 workshop on beauty contests at the Isaac Newton Institute, the 2005 workshop on coordination games at the Cowles Foundation, the 2006 North American Winter Meeting and the 2006 European Summer Meeting of the Econometric Society, and the 2006 NBER Monetary Economics Meeting. We are grateful to the Federal Reserve Bank of Minneapolis for their hospitality during the latest revisions of this paper. This article is based upon work supported by the NSF through the collaborative research Grants SES 0519069 and SES 0518810. ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23 |
| ISSN: | 0012-9682 1468-0262 |
| DOI: | 10.1111/j.1468-0262.2007.00783.x |