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Value of information in competitive economies with incomplete markets

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  • Piero Gottardi
  • Rohit Rahi

Abstract

A substantial literature addresses the negative eect on welfare of the release of information in a competitive market economy. We show that the value of information in this setting is typically positive if asset markets are suciently incomplete. More specically, for any competitive equilibrium of a generic economy, we can nd a ner information structure such that an allocation that is resource feasible and measurable with respect to this information ex- post Pareto dominates the given equilibrium allocation.

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File URL: http://eprints.lse.ac.uk/4749/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 4749.

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Length: 24 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:ehl:lserod:4749

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Keywords: Competitive Equilibrium; Incomplete Markets; Value of Information;

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References

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  1. Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer, vol. 11(3), pages 495-521.
  2. 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.
  3. Eckwert, Bernhard & Zilcha, Itzhak, 2001. "The Value of Information in Production Economies," Journal of Economic Theory, Elsevier, vol. 100(1), pages 172-186, September.
  4. Colin M. Campbell, 2002. "Blackwell's Ordering and Public Information," Departmental Working Papers 200206, Rutgers University, Department of Economics.
  5. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, vol. 91(3), pages 509-524, June.
  7. Rohit Rahi, 2000. "Efficiency Properties of Rational Expectations Equilibria with Asymmetric Information," Econometric Society World Congress 2000 Contributed Papers 1468, Econometric Society.
  8. Lawrence Blume & Tarek Coury & David Easley, 2006. "Information, trade and incomplete markets," Economic Theory, Springer, vol. 29(2), pages 379-394, October.
  9. Alessandro Citanna & Antonio Villanacci, . "Incomplete markets, allocative efficiency and the information revealed by prices," GSIA Working Papers 10, Carnegie Mellon University, Tepper School of Business.
  10. Milne, Frank & Shefrin, H. M., 1987. "Information and securities: A note on pareto dominance and the second best," Journal of Economic Theory, Elsevier, vol. 43(2), pages 314-328, December.
  11. Michael Magill & Martine Quinzii, 2002. "Theory of Incomplete Markets, Volume 1," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262632543, December.
  12. David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer, vol. 11(3), pages 467-494.
  13. 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.
  14. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
  15. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  16. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  17. Green, Jerry R, 1981. "Value of Information with Sequential Futures Markets," Econometrica, Econometric Society, vol. 49(2), pages 335-58, March.
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Cited by:
  1. Piero Gottardi & Rohit Rahi, 2013. "Risk sharing and retrading in incomplete markets," Economic Theory, Springer, vol. 54(2), pages 287-304, October.

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