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Information Acquisition, Efficiency, and Non-Fundamental Volatility

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  • Benjamin M. Hébert
  • Jennifer La'O

Abstract

We analyze non-fundamental volatility and efficiency in large games featuring 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 can learn about exogenous states as well as endogenous aggregate actions. We study how properties of information costs relate to properties of equilibria. We provide necessary and sufficient conditions to guarantee zero non-fundamental volatility in equilibrium and another set of necessary and sufficient conditions to guarantee constrained efficient equilibria. Mutual information, the cost typically assumed in rational inattention models, precludes non-fundamental volatility and imposes efficiency.

Suggested Citation

  • Benjamin M. Hébert & Jennifer La'O, 2020. "Information Acquisition, Efficiency, and Non-Fundamental Volatility," NBER Working Papers 26771, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26771
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    References listed on IDEAS

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    1. Xavier Vives, 2017. "Endogenous Public Information and Welfare in Market Games," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 935-963.
    2. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    3. 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.
    4. Laffont, Jean-Jacques M, 1985. "On the Welfare Analysis of Rational Expectations Equilibria with Asymmetric Information," Econometrica, Econometric Society, vol. 53(1), pages 1-29, January.
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    6. Luigi Paciello & Mirko Wiederholt, 2014. "Exogenous Information, Endogenous Information, and Optimal Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(1), pages 356-388.
    7. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    8. Vives, Xavier, 1988. "Aggregation of Information in Large Cournot Markets," Econometrica, Econometric Society, vol. 56(4), pages 851-876, July.
    9. Christian Hellwig & Laura Veldkamp, 2009. "Knowing What Others Know: Coordination Motives in Information Acquisition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(1), pages 223-251.
    10. Alessandro Pavan, 2014. "Attention, Coordination, and Bounded Recall," Discussion Papers 1576, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
    12. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
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    Cited by:

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

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    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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