Information Percolation with Equilibrium Search Dynamics

61 Pages Posted: 29 Jan 2009 Last revised: 27 Nov 2009

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Gustavo Manso

University of California, Berkeley - Haas School of Business

Date Written: January 27, 2009

Abstract

We solve for the equilibrium dynamics of information sharing in a large population. Each agent is endowed with signals regarding the likely outcome of a random variable of common concern. Individuals choose the effort with which they search for others from whom they can gather additional information. When two agents meet, they share their information. The information gathered is further shared at subsequent meetings, and so on. Equilibria exist in which agents search maximally until they acquire sufficient information precision, and then minimally. A tax whose proceeds are used to subsidize the costs of search improves information sharing and can in some cases increase welfare. On the other hand, endowing agents with public signals reduces information sharing and can in some cases decrease welfare.

Keywords: search, matching, equilibrium, information, percolation

JEL Classification: C78, C73, C62

Suggested Citation

Duffie, James Darrell and Malamud, Semyon and Manso, Gustavo, Information Percolation with Equilibrium Search Dynamics (January 27, 2009). Econometrica, Vol. 77, No. 5, Swiss Finance Institute Research Paper No. 09-02, Available at SSRN: https://ssrn.com/abstract=1333963

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Canadian Derivatives Institute ( email )

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Canada

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Gustavo Manso

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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