Competitive Information Discovery

Abstract

Information acquisition in a market economy can be inefficient for reasons beyond the externalities where one agent's discoveries can benefit others.  Self-confirming price expectations can stop agents from uncovering information and from generating the evidence that their expectations are inaccurate. When priors are diverse or agents fail to be risk-averse, there may be Pareto-improvements that agents cannot achieve through market trades.  When these obstacles are absent, however, agents in competitive economies will acquire information optimally even when efficiency requires agents to bear risk.  Firms will direct discoveries and investments to riskier technologies, which maximization of expected output requires.

Keywords: Information Discovery, Competitive Equilibrium, Pareto Optimality, Self-Confirming Equilibria

JEL Classification: D51, D61, D81, D83