Information and Volatility
In an economy of interacting agents with both idiosyncratic and aggregate shocks, we examine how the information structure determines aggregate volatility. We show that the maximal aggregate volatility is attained in a noise free information structure in which the agents confound idiosyncratic and common components of the payoff state, and display excess response to the common component, as in Lucas (1972). The upper bound on aggregate volatility is linearly increasing in the variance of idiosyncratic shocks, for any given variance of aggregate shocks. Our results hold in a setting of symmetric agents with linear best responses and normal uncertainty. We show our results by providing a characterization of the set of all joint distributions over actions and states that can arise in equilibrium under any information structure. This tractable characterization, extending results in Bergemann and Morris (2013b), can be used to address a wide variety of questions.
|Date of creation:||Dec 2013|
|Date of revision:||Jun 2014|
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- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
- Richard N. Clarke, 1983. "Collusion and the Incentives for Information Sharing," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 383-394, Autumn.
- Venky Venkateswaran, 2011. "Heterogeneous Information and Labor Market Fluctuations," 2011 Meeting Papers 1292, Society for Economic Dynamics.
- Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
- Alison J. Kirby, 1988. "Trade Associations as Information Exchange Mechanisms," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 138-146, Spring.
- Venky Venkateswaran & Christian Hellwig, 2009. "Setting The Right Prices for the Wrong Reasons," 2009 Meeting Papers 260, Society for Economic Dynamics.
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