Endogenous Public Information and Welfare in Market Games

Xavier Vives

The Review of Economic Studies, 2017, vol. 84, issue 2, 935-963

Abstract: This article performs a welfare analysis of markets with private information in which agents condition on prices in the rational expectations tradition. Price-contingent strategies introduce two externalities in the use of private information: a pecuniary externality and a learning externality. The pecuniary externality induces agents to put too much weight on private information and in the standard case, when the allocation role of the price prevails over its informational role, overwhelms the learning externality which impinges in the opposite way. The price may be very informative but at the cost of an excessive dispersion of the actions of agents. The welfare loss at the market solution may be increasing in the precision of private information. The analysis provides insights into optimal business cycle policy and a rationale for a Tobin-like tax for financial transactions.

Keywords: Learning externality; Asymmetric information; Pecuniary externality; Team solution; Rational expectations; Cursed equilibrium; Tobin tax; Business cycle policy (search for similar items in EconPapers)
JEL-codes: D82 D83 G14 H23 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (37)

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Related works:
Working Paper: Endogenous Public Information and Welfare in Market Games (2016)
Working Paper: Endogenous Public Information and Welfare in Market Games (2011)
Working Paper: Endogenous Public Information and Welfare in Market Games (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:84:y:2017:i:2:p:935-963.

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