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Endogenous Public Information and Welfare

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  • Xavier Vives

Abstract

This paper performs a welfare analysis of economies with private information when public information is endogenously generated and agents can condition on noisy public statistics in the rational expectations tradition. Equilibrium is not (restricted) efficient even when feasible allocations share similar properties to the market context (e.g., linear in information). The reason is that the market in general does not internalize the informational externality when public statistics (e.g., prices) convey information and does not balance optimally non-fundamental volatility and the dispersion of actions. Under strategic substitutability, equilibrium prices will tend to convey too little information when the “informational” role of prices prevails over its “index of scarcity” role and too much information in the opposite case. Under strategic complementarity, prices always convey too little information. The welfare loss at the market solution may be increasing in the precision of private information. These results extend to the internal efficiency benchmark (accounting only for the collective welfare of the active players). Received results—on the relative weights placed by agents on private and public information, when the latter is exogenous—may be overturned.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3492.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3492

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Keywords: information externality; strategic complementarity and substitutability; asymmetric information; excess volatility; team solution; rational expectations; behavioral traders;

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Cited by:
  1. Xavier Vives, 2009. "Strategic Supply Function Competition with Private Information," Cowles Foundation Discussion Papers 1736, Cowles Foundation for Research in Economics, Yale University.

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