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Information Acquisition, Efficiency, and Nonfundamental Volatility

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  • Benjamin Hébert
  • Jennifer La’O

Abstract

We analyze efficiency and nonfundamental volatility in a class of generalized beauty-contest economies with endogenous information. As in models of rational-expectations equilibria, agents learn about exogenous states and endogenous aggregate actions. As in models of rational inattention, agents choose their information structures subject to a cost. We identify conditions on information costs that guarantee the existence of efficient or inefficient equilibria; we further identify conditions that guarantee the existence or nonexistence of equilibria with zero nonfundamental volatility. Mutual information, the cost typically assumed in rational-inattention models, guarantees the existence of an efficient equilibrium with zero nonfundamental volatility.

Suggested Citation

  • Benjamin Hébert & Jennifer La’O, 2023. "Information Acquisition, Efficiency, and Nonfundamental Volatility," Journal of Political Economy, University of Chicago Press, vol. 131(10), pages 2666-2723.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/724575
    DOI: 10.1086/724575
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    References listed on IDEAS

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    1. Xavier Vives, 2017. "Endogenous Public Information and Welfare in Market Games," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 935-963.
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    Cited by:

    1. Bartosz Maćkowiak & Filip Matějka & Mirko Wiederholt, 2023. "Rational Inattention: A Review," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 226-273, March.
    2. Takashi Ui, 2022. "Impacts of Public Information on Flexible Information Acquisition," Papers 2204.09250, arXiv.org, revised Apr 2022.
    3. Acharya, Sushant & Benhabib, Jess & Huo, Zhen, 2021. "The anatomy of sentiment-driven fluctuations," Journal of Economic Theory, Elsevier, vol. 195(C).
    4. Takashi Ui, 2022. "Optimal and Robust Disclosure of Public Information," Papers 2203.16809, arXiv.org, revised Apr 2022.
    5. Denti, Tommaso, 2023. "Unrestricted information acquisition," Theoretical Economics, Econometric Society, vol. 18(3), July.
    6. Broer, Tobias & Kohlhas, Alexandre N. & Mitman, Kurt & Schlafmann, Kathrin, 2022. "On the possibility of Krusell-Smith Equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    7. Rigos, Alexandros, 2022. "The normality assumption in coordination games with flexible information acquisition," Journal of Economic Theory, Elsevier, vol. 203(C).

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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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