Endogenous public information and welfare

Xavier Vives

No D/925, IESE Research Papers from IESE Business School

Abstract: This paper performs a welfare analysis of economies with private information when public information is endogenously generated and agents can condition on noisy public statistics in the rational expectations tradition. We find that equilibrium is not (restricted) efficient even when feasible allocations share similar properties to the market context (e.g., linear in information). The reason is that the market in general does not internalize the informational externality when public statistics (e.g., prices) convey information. Under strategic substitutability, equilibrium prices will tend to convey too little information when the "informational" role of prices prevails over its index of scarcity" role and too much information in the opposite case. Under strategic complementarity, prices always convey too little information. These results extend to the internal efficiency benchmark (accounting only for the collective welfare of the active players). However, received results-on the relative weights placed by agents on private and public information, when the latter is exogenous-may be overturned.

Keywords: information externality; strategic complementarity and substitutability; asymmetric information; team solution; rational expectations; schedule competition; behavioral traders (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011-06-01
New Economics Papers: this item is included in nep-bec, nep-cba, nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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