Efficiency With Endogenous Information Choice
AbstractWe study the efficiency of information acquisition decisions in models with dispersed information and strategic considerations. Our main result is that information choice is typically inefficient because agents do not fully internalize the effects of their information on others. This ex-ante suboptimality is obtained even in environments where information is used efficiently ex-post. We demonstrate this finding in 3 benchmark environments. In a beauty contest model `a la Morris and Shin (1998), incentives to invest in information can diverge from the socially optimal level because the absolute level of the plannerÃƒÂ¢Ã‚Ã‚s welfare criterion is different from that of the private payoff function. In a RBC framework with dispersed information about technology shocks, distortions due to imperfect substitutability have no effect on incentives to respond to information, but distort the private value of information, leading to an inefficiently low level of information acquired in equilibrium. Finally, in a monetary model with nominal price-setting by heterogeneously informed firms, inefficiencies arise in both the use and the acquisition of information. Importantly, the latter persist even when the former are removed. We also discuss optimal policy response to address these inefficiencies.
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Date of creation: 2012
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