Efficiency with Endogenous Information Choice

Luis-Gonzalo Llosa and Venky Venkateswaran

No 44, Working Papers from Peruvian Economic Association

Abstract: We study the efficiency of equilibrium in a business cycle model where monopolistically competitive firms acquire costly information about aggregate fundamentals before making pricing and input decisions. We show that market power reduces the private value of information relative to its social value, causing too little investment in learning and inefficient cyclical fluctuations. Importantly, this is true even in an environment where the ex-post response to information is socially optimal. A leading example of this dichotomy between ex-post and ex-ante efficiency is an environment where firms choose labor input under uncertainty about aggregate productivity. When firms set nominal prices, on the other hand, their actions exhibit a inefficiently high sensitivity to private signals. The combination of this inefficiency in information use and market power makes the overall direction of the inefficiency in information acquisition ambiguous. Finally, we show that the standard full information policy response to market power-related distortions can reduce welfare under endogenous uncertainty. These results hold for different types of shocks (real and nominal) and for a general class of information acquisition technologies.

Keywords: Incomplete information; Costly information; Externalities; Business cycles; Optimal policy (search for similar items in EconPapers)
JEL-codes: D62 D82 E31 E32 E62 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://perueconomics.org/wp-content/uploads/2014/01/WP-44.pdf Application/pdf

Related works:
Working Paper: EFFICIENCY WITH ENDOGENOUS INFORMATION CHOICE (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:apc:wpaper:2015-044

Access Statistics for this paper

More papers in Working Papers from Peruvian Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Nelson Ramírez-Rondán ().