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Information Processing and Limited Liability

Author

Listed:
  • Mirko Wiederholt

    (Goethe University Frankfurt)

  • Bartosz Mackowiak

    (European Central Bank)

Abstract

Decision-makers often face limited liability and thus know that their loss will be bounded. We study how limited liability affects the behavior of an agent who chooses how much information to acquire and process in order to take a good decision. We find that an agent facing limited liability processes less information than an agent with unlimited liability. The informational gap between the two agents is larger in bad times than in good times and when information is more costly to process.

Suggested Citation

  • Mirko Wiederholt & Bartosz Mackowiak, 2013. "Information Processing and Limited Liability," 2013 Meeting Papers 1140, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:1140
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    2. Natalia Fabra & Mar Reguant, 2014. "Pass-Through of Emissions Costs in Electricity Markets," American Economic Review, American Economic Association, vol. 104(9), pages 2872-2899, September.
    3. Kryvtsov, Oleksiy & Petersen, Luba, 2021. "Central bank communication that works: Lessons from lab experiments," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 760-780.
    4. Gemmi, Luca, 2024. "Rational overoptimism and limited liability," Journal of Monetary Economics, Elsevier, vol. 143(C).
    5. Michael Sockin & Mindy Z Xiaolan, 2023. "Delegated Learning and Contract Commonality in Asset Management," Review of Finance, European Finance Association, vol. 27(6), pages 1931-1975.
    6. Melcangi, Davide & Turen, Javier, 2023. "Subsidizing startups under imperfect information," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 93-109.
    7. Mondher Bellalah & Akeb Hakim & Kehan Si & Detao Zhang, 2022. "Long term optimal investment with regime switching: inflation, information and short sales," Annals of Operations Research, Springer, vol. 313(2), pages 1373-1386, June.
    8. Mondher bellalah, 2018. "Pricing derivatives in the presence of shadow costs of incomplete information and short sales," Annals of Operations Research, Springer, vol. 262(2), pages 389-411, March.
    9. José-Elías Gallegos, 2023. "Inflation persistence, noisy information and the Phillips curve," Working Papers 2309, Banco de España.
    10. Mondher Bellalah, 2018. "On information costs, short sales and the pricing of extendible options, steps and Parisian options," Annals of Operations Research, Springer, vol. 262(2), pages 361-387, March.
    11. Bellalah, Mondher, 2016. "Shadow costs of incomplete information and short sales in the valuation of the firm and its assets," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 406-419.
    12. Daniel Susskind, 2022. "Rational inattention and public signals," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 58(2), pages 225-255, February.
    13. Hibiki Ichiue & Maiko Koga & Tatsushi Okuda & Tatsuya Ozaki, 2019. "Households' Liquidity Constraint, Optimal Attention Allocation, and Inflation Expectations," Bank of Japan Working Paper Series 19-E-8, Bank of Japan.
    14. Mackowiak, Bartosz & Wiederholt, Mirko, 2011. "Inattention to Rare Events," CEPR Discussion Papers 8626, C.E.P.R. Discussion Papers.
    15. Herresthal, Claudia, 2022. "Hidden testing and selective disclosure of evidence," Journal of Economic Theory, Elsevier, vol. 200(C).
    16. Stephanie L. Chan, 2021. "The Social Value of Public Information When Not Everyone is Privately Informed," Working Papers 2021-09-18, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    17. Nezafat, Mahdi & Schroder, Mark & Wang, Qinghai, 2017. "Short-sale constraints, information acquisition, and asset prices," Journal of Economic Theory, Elsevier, vol. 172(C), pages 273-312.
    18. Roc Armenter & Michèle Müller‐Itten & Zachary R. Stangebye, 2024. "Geometric methods for finite rational inattention," Quantitative Economics, Econometric Society, vol. 15(1), pages 115-144, January.

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