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
Date Written: July 1, 2007
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: Suggested Citation