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Transparency and Costly Information Acquisition

Ryan Chahrour

No 1221, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: I study the choice of economic transparency in a heterogeneous-information model where agents must pay a cost to observe the announcements of an information authority. The authority chooses transparency by selecting the number of signals regarding an aggregate state to make public, and agents respond by choosing how many of those signals to observe. I show that, when agents seek to coordinate their actions, the amount of information actually gathered by agents is non-monotonic in the transparency of the authority. The optimal degree of transparency is always interior and depends on the strength of complementarities in the economy. Transparency is distinguished from the precision of the authority's own information and the ``quality" of its communications; increases in these are shown to be welfare improving under plausible conditions.

Date: 2011
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