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Efficiency With Endogenous Information Choice

  • Venky Venkateswaran
  • Luis Llosa

    (UCLA)

We study the efficiency of information acquisition decisions in models with dispersed information and strategic considerations. Our main result is that information choice is typically inefficient because agents do not fully internalize the effects of their information on others. This ex-ante suboptimality is obtained even in environments where information is used efficiently ex-post. We demonstrate this finding in 3 benchmark environments. In a beauty contest model `a la Morris and Shin (1998), incentives to invest in information can diverge from the socially optimal level because the absolute level of the plannerâÂÂs welfare criterion is different from that of the private payoff function. In a RBC framework with dispersed information about technology shocks, distortions due to imperfect substitutability have no effect on incentives to respond to information, but distort the private value of information, leading to an inefficiently low level of information acquired in equilibrium. Finally, in a monetary model with nominal price-setting by heterogeneously informed firms, inefficiencies arise in both the use and the acquisition of information. Importantly, the latter persist even when the former are removed. We also discuss optimal policy response to address these inefficiencies.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 660.

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Date of creation: 2012
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Handle: RePEc:red:sed012:660
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  1. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  2. Hellwig, Christian & Veldkamp, Laura, 2007. "Knowing What Others Know: Coordination Motives in Information Acquisition," CEPR Discussion Papers 6506, C.E.P.R. Discussion Papers.
  3. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
  4. Laura Veldkamp, 2004. "Media Frenzies in Markets for Financial Information," Econometric Society 2004 North American Winter Meetings 4, Econometric Society.
  5. Manuel Amador & Pierre Olivier Weill, 2008. "Learning from Prices: Public Communication and Welfare," 2008 Meeting Papers 390, Society for Economic Dynamics.
  6. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
  7. Luca Colombo & Gianluca Femminis, 2007. "The Social Value of Public Information with Costly Information Acquisition," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0073, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  8. Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers 283, UCLA Department of Economics.
  9. 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.
  10. Kristoffer Nimark, 2007. "Dynamic Pricing and Imperfect Common Knowledge," RBA Research Discussion Papers rdp2007-12, Reserve Bank of Australia.
  11. David P. Myatt & Chris Wallace, 2008. "On the Sources and Value of Information: Public Announcements and Macroeconomic Performance," Economics Series Working Papers 411, University of Oxford, Department of Economics.
  12. Venky Venkateswaran & Christian Hellwig, 2009. "Setting The Right Prices for the Wrong Reasons," 2009 Meeting Papers 260, Society for Economic Dynamics.
  13. Moscarini, Giuseppe, 2004. "Limited information capacity as a source of inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 2003-2035, September.
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