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Endogenous Public Information and Welfare in Market Games

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  • Xavier Vives

Abstract

This paper performs a welfare analysis of markets with private information in which agents condition on prices in the rational expectations tradition. Price-contingent strategies introduce two externalities in the use of private information: a pecuniary externality and a learning externality. The pecuniary externality induces agents to put too much weight on private information and in the standard case, when the allocation role of the price prevails over its informational role, overwhelms the learning externality which impinges in the opposite way. The price may be very informative but at the cost of an excessive dispersion of the actions of agents. The welfare loss at the market solution may be increasing in the precision of private information. The analysis provides insights into optimal business cycle policy and a rationale for a Tobin-like tax for financial transactions.

Suggested Citation

  • Xavier Vives, 2011. "Endogenous Public Information and Welfare in Market Games," CESifo Working Paper Series 3492, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3492
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    References listed on IDEAS

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    Cited by:

    1. Camille Cornand & Rodolphe Dos Santos Ferreira, 2015. "Cooperation in a differentiated duopoly when information is dispersed: A beauty contest game with endogenous concern for coordination," Working Papers halshs-01116156, HAL.
    2. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Endogenous information acquisition and countercyclical uncertainty," Journal of Economic Theory, Elsevier, vol. 165(C), pages 601-642.
    3. Gaetano Gaballo, 2018. "Price Dispersion, Private Uncertainty, and Endogenous Nominal Rigidities," Review of Economic Studies, Oxford University Press, vol. 85(2), pages 1070-1110.
    4. repec:eee:macchp:v2-1065 is not listed on IDEAS

    More about this item

    Keywords

    learning externality; asymmetric information; pecuniary externality; team solution; rational expectations; cursed equilibrium; Tobin tax; business cycle policy;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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