Incomplete risk sharing arrangements and the value of information

Bernhard Eckwert and Itzhak Zilcha

Economic Theory, 2003, vol. 21, issue 1, 43-58

Abstract: The paper constructs a theoretical framework in which the value of information in general equilibrium is determined by the interaction of two opposing mechanisms: first, more information about future random events leads to better individual decisions and, therefore, higher welfare. This is the ‘Blackwell effect’ where information has positive value. Second, more information in advance of trading limits the risk sharing opportunities in the economy and, therefore, reduces welfare. This is the ‘Hirshleifer effect’ where information has negative value. We demonstrate that in an economy with production information has positive value if the information refers to non-tradable risks; hence, such information does not destroy the Blackwell theorem. Information which refers to tradable risks may invalidate the Blackwell theorem if the consumers are highly risk averse. The critical level of relative risk aversion beyond which the value of information becomes negative is less than 0.5. Copyright Springer-Verlag Berlin Heidelberg 2003

Keywords: Keywords and Phrases: Value of information; General equilibrium; Risk sharing markets.; JEL Classification Numbers: D8; D51; D52. (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (35)

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Working Paper: Incomplete Risk Sharing Arrangements and the Value of Information (1999)
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DOI: 10.1007/s00199-002-0275-x

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