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The Value of Information in Efficient Risk-Sharing Arrangements

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Author Info
Edward E. Schlee

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Abstract

Suppose that agents share risks in competitive markets. We show that better information makes everyone worse off if the economy has a representative agent--that is, the economy's demand for state-contingent consumption equals the demand of a hypothetical agent who owns all the economy's wealth. The representative agent, moreover, is normatively unrepresentative: although each agent dislikes information, the "representative" agent is indifferent. Although we emphasize pure exchange, our results imply that a representative-agent model might seriously misstate the welfare effects of improved information in an economy with production and risk sharing, even if it performs well otherwise.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 3 (June)
Pages: 509-524
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Handle: RePEc:aea:aecrev:v:91:y:2001:i:3:p:509-524

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Eckwert, B. & Zilcha, I., 1999. "Incomplete Risk Sharing Arrangements and the Value of Information," Papers 13-99, Tel Aviv.
  2. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September. [Downloadable!] (restricted)
  3. Green, Jerry R, 1981. "Value of Information with Sequential Futures Markets," Econometrica, Econometric Society, vol. 49(2), pages 335-58, March. [Downloadable!] (restricted)
  4. Dow, James & da Costa Werlang, Sergio Ribeiro, 1988. "The consistency of welfare judgments with a representative consumer," Journal of Economic Theory, Elsevier, vol. 44(2), pages 269-280, April. [Downloadable!] (restricted)
    Other versions:
  5. repec:att:wimass:199210 is not listed on IDEAS
  6. El-Gamal, Mahmoud A. & Sundaram, Rangarajan K., 1993. "Bayesian economists ... Bayesian agents : An alternative approach to optimal learning," Journal of Economic Dynamics and Control, Elsevier, vol. 17(3), pages 355-383, May. [Downloadable!] (restricted)
  7. Harrington Jr. , Joseph E., 1995. "Experimentation and Learning in a Differentiated-Products Duopoly," Journal of Economic Theory, Elsevier, vol. 66(1), pages 275-288, June. [Downloadable!] (restricted)
  8. Crocker, Keith J. & Snow, Arthur, 1992. "The social value of hidden information in adverse selection economies," Journal of Public Economics, Elsevier, vol. 48(3), pages 317-347, August. [Downloadable!] (restricted)
  9. Marshall, John M, 1974. "Private Incentives and Public Information," American Economic Review, American Economic Association, vol. 64(3), pages 373-90, June. [Downloadable!] (restricted)
  10. Mirman Leonard J. & Samuelson Larry & Schlee Edward E., 1994. "Strategic Information Manipulation in Duopolies," Journal of Economic Theory, Elsevier, vol. 62(2), pages 363-384, April. [Downloadable!] (restricted)
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  11. Hakansson, Nils H & Kunkel, J Gregory & Ohlson, James A, 1982. " Sufficient and Necessary Conditions for Information to Have Social Value in Pure Exchange," Journal of Finance, American Finance Association, vol. 37(5), pages 1169-81, December. [Downloadable!] (restricted)
  12. Berk Jonathan B. & Uhlig Harald, 1993. "The Timing of Information in a General Equilibrium Framework," Journal of Economic Theory, Elsevier, vol. 59(2), pages 275-287, April. [Downloadable!] (restricted)
  13. Brennan, M. J. & Kraus, Alan, 1978. "Necessary Conditions for Aggregation in Securities Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(03), pages 407-418, September. [Downloadable!]
  14. Kirman, Alan P, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-36, Spring. [Downloadable!] (restricted)
  15. Manjira Datta & Leonard J. Mirman & Edward E. Schlee, 2002. "Optimal Experimentation in Signal Dependent Decision Problems," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 577-608, May. [Downloadable!] (restricted)
  16. Doherty, Neil A. & Thistle, Paul D., 1996. "Adverse selection with endogenous information in insurance markets," Journal of Public Economics, Elsevier, vol. 63(1), pages 83-102, December. [Downloadable!] (restricted)
  17. Freixas, Xavier, 1981. "Optimal growth with experimentation," Journal of Economic Theory, Elsevier, vol. 24(2), pages 296-309, April. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Piergiuseppe Morone, 2004. "Investigating The Effects Of Information On Income Distribution Using Experimental Data," Experimental 0407006, EconWPA. [Downloadable!]
    Other versions:
  2. Ezra Einy & Diego Moreno & Benyamin Shitovitz, 2002. "The Value Of Public Information In A Cournot Duopoly," Economics Working Papers we024617, Universidad Carlos III, Departamento de Economía. [Downloadable!]
    Other versions:
  3. Bernhard Eckwert & Burkhard Drees, 2002. "Welfare Effects of Transparency in Foreign Exchange Markets: The Role of Hedging Opportunities," IMF Working Papers 02/219, International Monetary Fund. [Downloadable!]
  4. Juan Carlos Hatchondo, 2005. "The value of information with heterogeneous agents and partially revealing prices," Working Paper 05-06, Federal Reserve Bank of Richmond. [Downloadable!]
  5. Udo Broll & Bernhard Eckwert, 2008. "The competitive firm under price uncertainty: the role of information and hedging," Decisions in Economics and Finance, Springer, vol. 31(1), pages 1-11, May. [Downloadable!] (restricted)
  6. Andrea Morone, 2005. "Financial Market in the Laboratory, an Experimental Analysis of some Stylized Facts," Papers on Strategic Interaction 2005-27, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
    Other versions:
  7. Bernhard Eckwert & Itzhak Zilcha, 2003. "The Effect of Better Information on Income Inequality," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  8. Juan Hatchondo, 2004. "The value of information with heterogeneous agents and partially revealing prices," Econometric Society 2004 North American Summer Meetings 175, Econometric Society. [Downloadable!]
  9. Piero Gottardi & Rohit Rahi, 2007. "Value of Information in Competitive Economies with Incomplete Markets," Working Papers 2007_25, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
    Other versions:
  10. Colin M. Campbell, 2002. "Blackwell's Ordering and Public Information," Departmental Working Papers 200206, Rutgers University, Department of Economics. [Downloadable!]
  11. Colin Campbell, 2003. "Implementation and Orderings of Public Information," Departmental Working Papers 200303, Rutgers University, Department of Economics. [Downloadable!]
  12. Bernhard Eckwert & Itzhak Zilcha, 2007. "The Effect of Better Information on Income Inequality," Economic Theory, Springer, vol. 32(2), pages 287-307, August. [Downloadable!] (restricted)
  13. Edward Schlee & Christian Gollier, . "Information and the Equity Premium," Working Papers 2133505, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
    Other versions:
  14. Bernhard Eckwert & Burkhard Drees, 2007. "Implications of More Precise Information for Technological Development and Welfare," IMF Working Papers 07/95, International Monetary Fund. [Downloadable!]
  15. Gao, Pingyang, 2008. "Disclosure Quality, Cost of Capital, and Investors’ Welfare," MPRA Paper 9478, University Library of Munich, Germany, revised Jun 2008. [Downloadable!]
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