The value of information with heterogeneous agents and partially revealing prices
This paper studies how the arrival of more precise information affects welfare in an economy with incomplete and differential information. We consider a single period, pure exchange economy with aggregate uncertainty in which agents show different attitudes towards risk: wealthy individuals are 'de facto' less risk averse than poor individuals. The first ones can then partially insure the last ones, allowing for mutual gains from trade. Agents ignore the actual probability distribution over the states. Instead, they learn from the market price and private signals, which in fact accounts for the presence of heterogeneous beliefs. In equilibrium, the dispersion in beliefs introduces an adverse effect: risk-taking agents are more pessimistic than the rest. This limits the possibilities to share risks and has a negative impact on welfare. The arrival of more precise information has therefore a double effect: it weakens the adverse effect on trade (as risk-taking agents become more optimistic, they offer more insurance) at the same time that it strengthens the Hirshleifer effect (agents are no longer able to insure against news that have already arrived). The first effect fosters and the second one discourages risk-sharing trades. The paper discusses in detail a case where the positive effect on trade offsets the negative effect. This lets us conclude that in an economy with partial information, agents' welfare may increase upon the receipt of more precise information. Even though the result looks intuitive, most of the previous literature has focused on the case with homogeneous beliefs. In such a framework, only the Hirshleifer effect is at work, and thus better information typically leads to a decrease in welfare
|Date of creation:||11 Aug 2004|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Burkhard Drees & Bernhard Eckwert, 2002.
"Welfare Effects of Transparency in Foreign Exchange Markets; The Role of Hedging Opportunities,"
IMF Working Papers
02/219, International Monetary Fund.
- Burkhard Drees & Bernhard Eckwert, 2003. "Welfare Effects of Transparency in Foreign Exchange Markets: the Role of Hedging Opportunities," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 453-463, 08.
- Bhattacharya, Utpal & Spiegel, Matthew, 1991.
"Insiders, Outsiders, and Market Breakdowns,"
Review of Financial Studies,
Society for Financial Studies, vol. 4(2), pages 255-82.
- Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
- Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-41, December.
- Marshall, John M, 1974. "Private Incentives and Public Information," American Economic Review, American Economic Association, vol. 64(3), pages 373-90, June.
- Alessandro Citanna & Antonio Villanacci, .
"Incomplete markets, allocative efficiency and the information revealed by prices,"
GSIA Working Papers
10, Carnegie Mellon University, Tepper School of Business.
- Citanna, Alessandro & Villanacci, Antonio, 2000. "Incomplete Markets, Allocative Efficiency, and the Information Revealed by Prices," Journal of Economic Theory, Elsevier, vol. 90(2), pages 222-253, February.
- Rohit Rahi & Piero Gottardi, 2001.
"Efficiency Properties of Rational Expectations Equilibria with Asymmetric Information,"
FMG Discussion Papers
dp381, Financial Markets Group.
- Rohit Rahi, 2000. "Efficiency Properties of Rational Expectations Equilibria with Asymmetric Information," Econometric Society World Congress 2000 Contributed Papers 1468, Econometric Society.
- Rohit Rahi & Piero Gottardi, 2001. "Efficiency properties of rational expectations equilibria with asymmetric information," LSE Research Online Documents on Economics 25059, London School of Economics and Political Science, LSE Library.
- Gottardi, Piero & Rahi, Rohit, 2001. "Efficiency Properties of Rational Expectations Equilibria with Asymmetric Information," CEPR Discussion Papers 2922, C.E.P.R. Discussion Papers.
- Green, Jerry R, 1981. "Value of Information with Sequential Futures Markets," Econometrica, Econometric Society, vol. 49(2), pages 335-58, March.
- Jose Marin & Rohit Rahi, 1996.
"Information Revelation and Market Incompleteness,"
Archive Working Papers
024, Birkbeck, Department of Economics, Mathematics & Statistics.
- Nils H. Hakansson & J. Gregory Kunkel & James A. Ohlson., 1981.
"Sufficient and Necessary Conditions for Information to Have Social Value in Pure Exchange,"
Research Program in Finance Working Papers
122, University of California at Berkeley.
- Hakansson, Nils H & Kunkel, J Gregory & Ohlson, James A, 1982. " Sufficient and Necessary Conditions for Information to Have Social Value in Pure Exchange," Journal of Finance, American Finance Association, vol. 37(5), pages 1169-81, December.
- Sanford J Grossman & Joseph E Stiglitz, 1997.
"On the Impossibility of Informationally Efficient Markets,"
Levine's Working Paper Archive
1908, David K. Levine.
- Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
- Ausubel, Lawrence M., 1990. "Partially-revealing rational expectations equilibrium in a competitive economy," Journal of Economic Theory, Elsevier, vol. 50(1), pages 93-126, February.
- Dubey, Pradeep & Geanakoplos, John & Shubik, Martin, 1987. "The revelation of information in strategic market games : A critique of rational expectations equilibrium," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 105-137, April.
- Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
- Martin Schneider & Juan Carlos Hatchondo & Per Krusell, 2005. "A Quantitative Model of Competitive Asset Pricing Under Private Information," 2005 Meeting Papers 464, Society for Economic Dynamics.
- Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
- Bernhard Eckwert & Itzhak Zilcha, 2003.
"Incomplete risk sharing arrangements and the value of information,"
Springer, vol. 21(1), pages 43-58, 01.
- Eckwert, B. & Zilcha, I., 1999. "Incomplete Risk Sharing Arrangements and the Value of Information," Papers 13-99, Tel Aviv.
- Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
- Holmstrom, Bengt & Myerson, Roger B, 1983.
"Efficient and Durable Decision Rules with Incomplete Information,"
Econometric Society, vol. 51(6), pages 1799-819, November.
- Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Rahi, Rohit, 1996.
"Adverse Selection and Security Design,"
Review of Economic Studies,
Wiley Blackwell, vol. 63(2), pages 287-300, April.
- Ng, David S., 1975. "Information accuracy and social welfare under homogeneous beliefs," Journal of Financial Economics, Elsevier, vol. 2(1), pages 53-70, March.
- Jonathan B. Berk, 1997. "The acquisition of information in a dynamic market (*)," Economic Theory, Springer, vol. 9(3), pages 441-451.
- Tom Krebs, 1999. "Information and Efficiency in Financial Market Equilibrium," Working Papers 99-20, Brown University, Department of Economics.
- Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, vol. 91(3), pages 509-524, June.
When requesting a correction, please mention this item's handle: RePEc:ecm:nasm04:175. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.