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Public Bads, Heterogeneous Beliefs, and the Value of Information

Hiroaki Sakamoto

Discussion papers from Graduate School of Economics Project Center, Kyoto University

Abstract: This paper develops a simple model of public bads where players have heterogeneous beliefs about the consequence of their collective action. Properties of equilibrium and its relation to beliefs and preference are examined, followed by a detailed investigation of the impacts of new information. Our analysis sheds light on an important trade-off associated with information policies in the presence of belief heterogeneity and ambiguity. In particular, we show that newly available information can unambiguously worsen the free-riding problem even when it better reflects the correct risk than the players’ beliefs. Adding information noise will never mitigate the public-bad nature of the problem if players are equally confident about their beliefs. When the beliefs are highly heterogeneous, however, a certain amount of information noise can be Pareto-improving, for which the degrees of risk and ambiguity aversion play asymmetric roles.

Keywords: externality; uncertainty; heterogeneous beliefs; information (search for similar items in EconPapers)
JEL-codes: C72 D80 D81 Q54 H23 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014-03
New Economics Papers: this item is included in nep-gth and nep-mic
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