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Public Bads, Heterogeneous Beliefs, and the Value of Information

  • Hiroaki Sakamoto

This paper develops a simple model of public bads where players have heterogeneous beliefs about the consequence of their collective action. Properties of equilibrium and its relation to beliefs and preference are examined, followed by a detailed investigation of the impacts of new information. Our analysis sheds light on an important trade-off associated with information policies in the presence of belief heterogeneity and ambiguity. In particular, we show that newly available information can unambiguously worsen the free-riding problem even when it better reflects the correct risk than the players’ beliefs. Adding information noise will never mitigate the public-bad nature of the problem if players are equally confident about their beliefs. When the beliefs are highly heterogeneous, however, a certain amount of information noise can be Pareto-improving, for which the degrees of risk and ambiguity aversion play asymmetric roles.

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File URL: http://www.econ.kyoto-u.ac.jp/projectcenter/Paper/e-13-009.pdf
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Paper provided by Graduate School of Economics Project Center, Kyoto University in its series Discussion papers with number e-13-009.

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Length: 48 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:kue:dpaper:e-13-009
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  1. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," NBER Working Papers 10391, National Bureau of Economic Research, Inc.
  2. Stefano DellaVigna, 2007. "Psychology and Economics: Evidence from the Field," NBER Working Papers 13420, National Bureau of Economic Research, Inc.
  3. Scott Condie, 2008. "Living with ambiguity: prices and survival when investors have heterogeneous preferences for ambiguity," Economic Theory, Springer, vol. 36(1), pages 81-108, July.
  4. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  5. Camille Cornand & Frank Heinemann, 2008. "Optimal Degree of Public Information Dissemination," Economic Journal, Royal Economic Society, vol. 118(528), pages 718-742, 04.
  6. Gradstein, Mark & Nitzan, Shmuel & Slutsky, Steven, 1992. "The Effect of Uncertainty on Interactive Behaviour," Economic Journal, Royal Economic Society, vol. 102(412), pages 554-61, May.
  7. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  8. Jonathan G. James & Phillip Lawler, 2011. "Optimal Policy Intervention and the Social Value of Public Information," American Economic Review, American Economic Association, vol. 101(4), pages 1561-74, June.
  9. Yann Bramoullé & Nicolas Treich, 2009. "Can Uncertainty Alleviate the Commons Problem?," Journal of the European Economic Association, MIT Press, vol. 7(5), pages 1042-1067, 09.
  10. Eichberger, Jurgen & Kelsey, David, 2002. "Strategic Complements, Substitutes, and Ambiguity: The Implications for Public Goods," Journal of Economic Theory, Elsevier, vol. 106(2), pages 436-466, October.
  11. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  12. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002. "A smooth model of decision making under ambiguity," ICER Working Papers - Applied Mathematics Series 11-2003, ICER - International Centre for Economic Research, revised Apr 2003.
  13. : Kostas Koufopoulos & : Roman Kozhan, 2013. "Welfare-Improving Ambiguity in Insurance Markets with Asymmetric Information," Working Papers wpn13-13, Warwick Business School, Finance Group.
  14. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
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