Transparency of Information and Coordination in Economies with Investment Complementarities

15 Pages Posted: 25 May 2011 Last revised: 24 Nov 2022

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 2004

Abstract

How do public and private information affect equilibrium allocations and social welfare in economies with investment complementarities? And what is the optimal transparency in the information conveyed, for example, by economic statistics, policy announcements, or news in the media? We first consider an environment where the complementarities are weak so that the equilibrium is unique no matter the structure of information. An increase in the precision of public information may have the perverse effect of increasing aggregate volatility. Nevertheless, as long as there is no value to lotteries, welfare unambiguously increases with an increase in either the relative or the absolute precision of public information. Hence, full transparency is optimal. This is because more transparency facilitates more effective coordination, which is valuable from a social perspective. On the other hand, when complementarities are strong enough that multiple equilibria are possible, more transparency permits the market to coordinate more effectively on either the bad or the good equilibrium. In this case, constructive ambiguity becomes optimal if there is a high risk that more transparency will lead to coordination failures.

Suggested Citation

Angeletos, George-Marios and Pavan, Alessandro, Transparency of Information and Coordination in Economies with Investment Complementarities (March 2004). NBER Working Paper No. w10391, Available at SSRN: https://ssrn.com/abstract=1852074

George-Marios Angeletos (Contact Author)

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Alessandro Pavan

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