Centralized or Decentralized Information: Which is Better for Providing Incentives?
University of Bristol - Department of Economics
Economic Inquiry, Vol. 48, Issue 2, pp. 290-305, April 2010
A risk-neutral ruler must invest in improving the quality of his country's infrastructures. Higher quality infrastructures increase the profitability of capital investment by foreign entrepreneurs. The ruler wishes to maximize the amount of capital investment that flows into the country. Before selecting their investment, entrepreneurs receive a signal on the quality of infrastructures. We consider two cases. First, all entrepreneurs observe the same signal (centralized information). Second, each entrepreneur receives an independently drawn signal (decentralized information). We compare the effectiveness of these two scenarios for incentivizing the ruler. We find remarkably clear-cut results. When the entrepreneurs’ investments are strategic complements, centralized information does a better job in incentivizing the ruler. The opposite holds when investments are strategic substitutes. This may help understand the role of media, rating agencies, public announcements, and ambiguity.
Number of Pages in PDF File: 16
JEL Classification: D82, D62
Date posted: March 29, 2010