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The value of information with heterogeneous agents and partially revealing prices

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Author Info
Juan Carlos Hatchondo
Abstract

This paper studies how the arrival of information affects welfare in a general equilibrium exchange economy with incomplete and differential information. It considers a setup in which agents differ in their attitudes toward risk. This introduces gains from trade. In equilibrium, the information sets differ across agents, i.e., they hold heterogeneous beliefs. For certain structures of primitives, the latter introduces an adverse effect on welfare. In this case, the arrival of information has opposite effects: on the one hand it weakens the adverse effect on trade, and on the other hand it strengthens the Hirshleifer effect. The first effect fosters and the second one discourages risk-sharing trades. When the first effect dominates, welfare increases upon the arrival of more precise information.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 05-06.

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Date of creation: 2005
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Handle: RePEc:fip:fedrwp:05-06

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Keywords: Prices;

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  1. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September. [Downloadable!] (restricted)
  2. Bernhard Eckwert & Itzhak Zilcha, 2003. "Incomplete risk sharing arrangements and the value of information," Economic Theory, Springer, vol. 21(1), pages 43-58, 01. [Downloadable!] (restricted)
  3. Jonathan B. Berk, 1997. "The acquisition of information in a dynamic market (*)," Economic Theory, Springer, vol. 9(3), pages 441-451.
  4. Rohit Rahi & Piero Gottardi, 2001. "Efficiency Properties of Rational Expectations Equilibria with Asymmetric Information," FMG Discussion Papers dp381, Financial Markets Group. [Downloadable!] (restricted)
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  5. Rahi, Rohit, 1996. "Adverse Selection and Security Design," Review of Economic Studies, Blackwell Publishing, vol. 63(2), pages 287-300, April. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
  7. 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. [Downloadable!]
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  8. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December. [Downloadable!]
  9. Tom Krebs, 1999. "Information and Efficiency in Financial Market Equilibrium," Working Papers 99-20, Brown University, Department of Economics.
  10. 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)
  11. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  12. Dubey, Pradeep & Geanakoplos, John & Shubik, Martin, 1987. "The revelation of information in strategic market games : A critique of rational expectations equilibrium," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 105-137, April. [Downloadable!] (restricted)
  13. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June. [Downloadable!] (restricted)
  14. Jose Marin & Rohit Rahi, 1996. "Information Revelation and Market Incompleteness," Archive Working Papers 024, Birkbeck, The Institute for Financial Research.
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