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Information Acquisition, Efficiency, and Non-fundamental Volatility

Author

Listed:
  • Hebert, Benjamin

    (Stanford U)

  • La'O, Jennifer

    (Columbia U)

Abstract

This paper analyzes non-fundamental volatility and efficiency in a class of large games (including e.g. linear-quadratic beauty contests) that feature strategic interaction and endogenous information acquisition. We adopt the rational inattention approach to information acquisition but generalize to a large class of information costs. Agents may learn not only about exogenous states, but also about endogenous outcomes. We study how the properties of the agents' information cost relate to the properties of equilibria in these games. We provide the necessary and sufficient conditions information costs must satisfy to guarantee zero non-fundamental volatility in equilibrium, and provide another set of necessary and sufficient conditions to guarantee equilibria are efficient. We show in particular that mutual information, the cost function typically used in the rational inattention literature, both precludes non-fundamental volatility and imposes efficiency, whereas the Fisher information cost introduced by Hebert and Woodford [2020] generates both non-fundamental volatility and inefficiency.

Suggested Citation

  • Hebert, Benjamin & La'O, Jennifer, 2020. "Information Acquisition, Efficiency, and Non-fundamental Volatility," Research Papers 3836, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3836
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    Cited by:

    1. Tian, Jianrong, 2024. "Informational separability and entropy," Journal of Economic Theory, Elsevier, vol. 216(C).
    2. 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.
    3. Takashi Ui, 2022. "Impacts of Public Information on Flexible Information Acquisition," Papers 2204.09250, arXiv.org, revised Apr 2022.
    4. Acharya, Sushant & Benhabib, Jess & Huo, Zhen, 2021. "The anatomy of sentiment-driven fluctuations," Journal of Economic Theory, Elsevier, vol. 195(C).
    5. Takashi Ui, 2022. "Optimal and Robust Disclosure of Public Information," Papers 2203.16809, arXiv.org, revised Apr 2022.
    6. Denti, Tommaso, 2023. "Unrestricted information acquisition," Theoretical Economics, Econometric Society, vol. 18(3), July.
    7. Rigos, Alexandros, 2022. "The normality assumption in coordination games with flexible information acquisition," Journal of Economic Theory, Elsevier, vol. 203(C).
    8. Pavan, Alessandro, 2025. "Attention, coordination, and bounded recall," Journal of Economic Theory, Elsevier, vol. 227(C).
    9. 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).

    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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