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The value of information with heterogeneous agents and partially revealing prices

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  • 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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Bibliographic Info

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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References

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  1. Bhattacharya, Utpal & Spiegel, Matthew, 1991. "Insiders, Outsiders, and Market Breakdowns," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 255-82.
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  3. Ausubel, Lawrence M., 1990. "Partially-revealing rational expectations equilibrium in a competitive economy," Journal of Economic Theory, Elsevier, vol. 50(1), pages 93-126, February.
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  7. Jose Marin & Rohit Rahi, 1996. "Information Revelation and Market Incompleteness," Archive Working Papers 024, Birkbeck, Department of Economics, Mathematics & Statistics.
  8. Rohit Rahi, 2000. "Efficiency Properties of Rational Expectations Equilibria with Asymmetric Information," Econometric Society World Congress 2000 Contributed Papers 1468, Econometric Society.
  9. Ng, David S., 1975. "Information accuracy and social welfare under homogeneous beliefs," Journal of Financial Economics, Elsevier, vol. 2(1), pages 53-70, March.
  10. 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.
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  12. Eckwert, B. & Zilcha, I., 1999. "Incomplete Risk Sharing Arrangements and the Value of Information," Papers 13-99, Tel Aviv.
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  16. Martin Schneider & Juan Carlos Hatchondo & Per Krusell, 2005. "A Quantitative Model of Competitive Asset Pricing Under Private Information," 2005 Meeting Papers 464, Society for Economic Dynamics.
  17. 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.
  18. Green, Jerry R, 1981. "Value of Information with Sequential Futures Markets," Econometrica, Econometric Society, vol. 49(2), pages 335-58, March.
  19. Citanna, Alessandro & Villanacci, Antonio, 2000. "Incomplete Markets, Allocative Efficiency, and the Information Revealed by Prices," Journal of Economic Theory, Elsevier, vol. 90(2), pages 222-253, February.
  20. Jonathan B. Berk, 1997. "The acquisition of information in a dynamic market (*)," Economic Theory, Springer, vol. 9(3), pages 441-451.
  21. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
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  23. Burkhard Drees & Bernhard Eckwert, 2002. "Welfare Effects of Transparency in Foreign Exchange Markets," IMF Working Papers 02/219, International Monetary Fund.
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Cited by:
  1. Elyès Jouini & Clotilde Napp, 2008. "Are More Risk-Averse Agents More Optimistic? Insights from a Simple Rational Expectations Equilibrium Model," Post-Print halshs-00176630, HAL.

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