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The Value of Information: Disadvantageous Risk-Sharing Markets

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Author Info

  • Eyal Sulganik

    (The Foerder Institute for Economic Research, TAU)

  • Itzhak Zilcha

Abstract

The narrow applicability of Blackwell's result that "more information" is desirable, lies in the fact in economic models once a signal is observed by all economic agents their opportunity sets may vary. We show that Blackwell's theorem does not hold when the feasible set of actions is signal-dependent. We find sufficient condition for the result to hold under these conditions. We also apply this result to two economic models where risk sharing markets are widespread: A model with futures markets and hedging and a model of life cycle where the lifetime horizon is a random variable. In both cases we show that in the absence of risk-sharing markets (i.e., futures markets or life insurance markets) more information is advantageous. On the other hand, when such markets are introduced we may find many cases where more information is disadvantageous to the risk-averse agents.

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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 9405001.

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Date of creation: 17 May 1994
Date of revision: 19 May 1994
Handle: RePEc:wpa:wuwpmi:9405001

Note: TeX file, 29 pp uses tcilatex.tex and qqaalart.sty (available in the TeX Macros and TeX Styles directories)
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  1. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
  2. Robert A. Jones & Joseph M. Ostroy, 1979. "Flexibilty and Uncertainty," UCLA Economics Working Papers 163, UCLA Department of Economics.
  3. Jerry R. Green & Nancy L. Stokey, 1980. "A Two-Person Game of Information Transmission," Discussion Papers 418, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Baron, David P, 1976. "Flexible Exchange Rates, Forward Markets, and the Level of Trade," American Economic Review, American Economic Association, vol. 66(3), pages 253-66, June.
  5. Kawai, Masahiro, 1981. "The Behaviour of an Open-Economy Firm under Flexible Exchange Rates," Economica, London School of Economics and Political Science, vol. 48(189), pages 45-60, February.
  6. Grossman, Sanford J & Kihlstrom, Richard E & Mirman, Leonard J, 1977. "A Bayesian Approach to the Production of Information and Learning by Doing," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 533-47, October.
  7. Feder, Gershon & Just, Richard E & Schmitz, Andrew, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 317-28, March.
  8. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-95, December.
  9. Kawai, Masahiro & Zilcha, Itzhak, 1986. "International trade with forward-futures markets under exchange rate and price uncertainty," Journal of International Economics, Elsevier, vol. 20(1-2), pages 83-98, February.
  10. 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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