Information Acquisition, Efficiency, and Nonfundamental Volatility

Benjamin Hébert and Jennifer La’O

Journal of Political Economy, 2023, vol. 131, issue 10, 2666 - 2723

Abstract: We analyze efficiency and nonfundamental volatility in a class of generalized beauty-contest economies with endogenous information. As in models of rational-expectations equilibria, agents learn about exogenous states and endogenous aggregate actions. As in models of rational inattention, agents choose their information structures subject to a cost. We identify conditions on information costs that guarantee the existence of efficient or inefficient equilibria; we further identify conditions that guarantee the existence or nonexistence of equilibria with zero nonfundamental volatility. Mutual information, the cost typically assumed in rational-inattention models, guarantees the existence of an efficient equilibrium with zero nonfundamental volatility.

Date: 2023
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Related works:
Working Paper: Information Acquisition, Efficiency, and Non-fundamental Volatility (2020)
Working Paper: Information Acquisition, Efficiency, and Non-Fundamental Volatility (2020)
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