Efficient Use of Information and Social Value of Information

Econometrica, Vol. 75, No. 4, pp. 1103-1142, July 2007

44 Pages Posted: 3 Jun 2010

See all articles by George-Marios Angeletos

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Alessandro Pavan

Northwestern University

Date Written: July 1, 2007

Abstract

This paper analyzes equilibrium and welfare for a tractable class of economies (games) with externalities, strategic complementarity or substitutability, and heterogenous information. First, we characterize the equilibrium use of information; complementarity heightens the sensitivity of equilibrium actions to public information, raising aggregate volatility, whereas substitutability heightens the sensitivity to private information, raising cross-sectional dispersion. Next, we define and characterize an efficiency benchmark designed to address whether the equilibrium use of information is optimal from a social perspective; the efficient use of information reflects the social value of aligning choices across agents. Finally, we examine the comparative statics of equilibrium welfare with respect to the information structure; the social value of information is best understood by classifying economies according to the inefficiency, if any, in the equilibrium use of information. We conclude with a few applications, including production externalities, beauty contests, business cycles, and large Cournot and Bertrand games.

Keywords: Incomplete information, coordination, complementarities, externalities, amplification, efficiency

JEL Classification: C72, D62, D82

Suggested Citation

Angeletos, George-Marios and Pavan, Alessandro, Efficient Use of Information and Social Value of Information (July 1, 2007). Econometrica, Vol. 75, No. 4, pp. 1103-1142, July 2007, Available at SSRN: https://ssrn.com/abstract=1620128

George-Marios Angeletos (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Alessandro Pavan

Northwestern University ( email )

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