A normalized value for information purchases

Antonio Cabrales, Olivier Gossner and Roberto Serrano

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Consider agents who are heterogeneous in their preferences and wealth levels. These agents may acquire information prior to choosing an investment that has a property of no-arbitrage, and each piece of information bears a corresponding cost. We associate a numeric index to each information purchase (information-cost pair). This index describes the normalized value of the information purchase: it is the risk-aversion level of the unique CARA agent who is indifferent between accepting and rejecting the purchase, and it is characterized by a \duality" principle that states that agents with a stronger preference for information should engage more often in information purchases. No agent more risk-averse than the index finds it profitable to acquire the information, whereas all agents less risk-averse than the index do. Given an empirically measured range of degrees of risk aversion in a competitive economy with no-arbitrage investments, our model therefore comes close to describ-ing an inverse demand for information, by predicting what pieces of information are acquired by agents and which ones are not. Among several desirable properties, the normalized-value formula induces a complete ranking of information structures that extends Blackwell's classic ordering.

Keywords: informativeness; information purchases; free energy; Kullback-Leibler divergence; relative entropy; decision under uncertainty; no-arbitrage investment; Blackwell ordering (search for similar items in EconPapers)
JEL-codes: L81 (search for similar items in EconPapers)
Date: 2017-05-19
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published in Journal of Economic Theory, 19, May, 2017, 170, pp. 266-288. ISSN: 0022-0531

Downloads: (external link)
http://eprints.lse.ac.uk/82501/ Open access version. (application/pdf)

Related works:
Journal Article: A normalized value for information purchases (2017)
Working Paper: A normalized value for information purchases (2017)
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:ehl:lserod:82501

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().