Increasing Returns in the Value of Information
AbstractIs there an intrinsic nonconcavity to the value of information? In an influential paper, Radner and Stiglitz (1984, henceforth RS) suggests that there is. They demonstrated, in a seemingly general model, that the marginal value of a small amount of information is zero. Since costless information is always (weakly) valuable, this finding implies that, unless the information is useless, it must exhibit increasing marginal returns over some range. RS do present a few examples that violate their assumptions for which information exhibits decreasing marginal returns. Yet, the conditions under which they obtain the nonconcavity do not seem initially to be overly strong. They index the information structure, represented by a Markov matrix of state-conditional signal distributions, by a parameter representing the `amount' of information, with a zero level of the parameter representing null information. The main assumption is that this Markov matrix be a differentiable in the index parameter at null information, which seems to be a standard smoothness assumption. As noted by RS, this nonconcavity has several implications: the demand for information will be a discontinuous function of its price; agents will not buy `small' quantities of information; and agents will tend to specialize in information production. The nonconcavity has been especially vexing to the literature on experimentation. If the value of information is not concave in the present action, then the analysis of optimal experimentation is much more complex. Moreover, some recent papers have considered experimentation in strategic settings (Harrington (JET 1995); Mirman, Samuelson and Schlee (JET 1994)). In these models, the nonconcavity means that the best reply mappings may not be convex-valued, so that pure strategy equilibria may not exist. The purpose of this paper is to re-examine the conditions under which a small amount of information has zero marginal value. Much of the experimentation and information demand literature has assumed either an infinite number of signal realizations or an infinite number of states, unlike the finite RS framework. Our objective is to clarify the conditions under which the nonconcavity holds in this more common framework. This general setting will help us to evaluate the robustness of the nonconcavity. We find that the assumptions required to obtain the nonconcavityare fairly strong; although some of the assumptions are purely technical, most are substantive: we present examples showing that their failure leads to a failure of nonconcavity.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1715.
Date of creation: 01 Aug 2000
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
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.:
- Mirman, L.J. & Samuelson, L. & Schlee, E.E., 1991.
"Strategic information manipulation in duopolies,"
1991-37, Tilburg University, Center for Economic Research.
- Arrow, Kenneth J, 1985. "Informational Structure of the Firm," American Economic Review, American Economic Association, vol. 75(2), pages 303-07, May.
- Giuseppe Moscarini & Lones Smith, 1998.
"Wald Revisited: The Optimal Level of Experimentation,"
Cowles Foundation Discussion Papers
1176, Cowles Foundation for Research in Economics, Yale University.
- Giuseppe Moscarini & Lones Smith, 1998. "Wald Revisited: The Optimal Level of Experimentation," Working papers 98-4, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bradford, David F & Kelejian, Harry H, 1977. "The Value of Information for Crop Forecasting in a Market System: Some Theoretical Issues," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 519-31, October.
- Aghion Philippe & Bolton, Patrick & Harris Christopher & Jullien Bruno, 1991.
"Optimal learning by experimentation,"
CEPREMAP Working Papers (Couverture Orange)
- Creane, Anthony, 1994. "Experimentation with Heteroskedastic Noise," Economic Theory, Springer, vol. 4(2), pages 275-86, March.
- Singh, Nirvikar, 1985. "Monitoring and Hierarchies: The Marginal Value of Information in a Principal-Agent Model," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 599-609, June.
- Tonks, Ian, 1984. "A Bayesian Approach to the Production of Information with a Linear Utility Function," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 521-27, July.
- Aghion, Philippe, et al, 1991. "Optimal Learning by Experimentation," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 621-54, July.
- Kiefer, Nicholas M & Nyarko, Yaw, 1989. "Optimal Control of an Unknown Linear Process with Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 571-86, August.
- Trefler, Daniel, 1993. "The Ignorant Monopolist: Optimal Learning with Endogenous Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 565-81, August.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.