Public and Private Learning from Prices, Strategic Substitutability and Complementarity, and Equilibrium Multiplicity

44 Pages Posted: 10 Sep 2010

See all articles by Carolina Manzano

Carolina Manzano

Universitat Rovira Virgili

Xavier Vives

University of Navarra - IESE Business School; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2010

Abstract

We study a general static noisy rational expectations model, where investors have private information about asset payoffs, with common and private components, and about their own exposure to an aggregate risk factor, and derive conditions for existence and uniqueness (or multiplicity) of equilibria. We find that a main driver of the characterization of equilibria is whether the actions of investors are strategic substitutes or complements. This latter property in turn is driven by the strength of a private learning channel from prices, arising from the multidimensional sources of asymmetric information, in relation to the usual public learning channel. When the private learning channel is strong (weak) in relation to the public we have strong (weak) strategic complementarity in actions and potentially multiple (unique) equilibria. The results enable a precise characterization of whether information acquisition decisions are strategic substitutes or complements. We find that the strategic substitutability in information acquisition result obtained in Grossman and Stiglitz (1980) is robust.

Keywords: Rational expectations equilibrium, strategic complementarity, multiplicity of equilibria, asymmetric information, risk exposure, hedging, supply information

JEL Classification: D82, D83, G14.

Suggested Citation

Manzano, Carolina and Vives, Xavier, Public and Private Learning from Prices, Strategic Substitutability and Complementarity, and Equilibrium Multiplicity (July 1, 2010). IESE Business School Working Paper No. 874, Available at SSRN: https://ssrn.com/abstract=1674377 or http://dx.doi.org/10.2139/ssrn.1674377

Carolina Manzano

Universitat Rovira Virgili ( email )

Tarragona
Spain

Xavier Vives (Contact Author)

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

HOME PAGE: http://wwwapp.iese.edu/faculty/facultyDetail.asp?lang=en&prof=xv

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
49
Abstract Views
715
PlumX Metrics