Endogenous Public Information and Welfare

37 Pages Posted: 21 Oct 2011

See all articles by Xavier Vives

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)

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Date Written: October 21, 2011

Abstract

This paper performs a welfare analysis of economies with private information when public information is endogenously generated and agents can condition on noisy public statistics in the rational expectations tradition. We find that equilibrium is not (restricted) efficient even when feasible allocations share similar properties to the market context (e.g., linear in information). The reason is that the market in general does not internalize the informational externality when public statistics (e.g., prices) convey information. Under strategic substitutability, equilibrium prices will tend to convey too little information when the 'informational' role of prices prevails over its index of scarcity role and too much information in the opposite case. Under strategic complementarity, prices always convey too little information. These results extend to the internal efficiency benchmark (accounting only for the collective welfare of the active players). However, received results - on the relative weights placed by agents on private and public information when the latter is exogenous - may be overturned.

Keywords: information externality, strategic complementary and substitutability, asymetric information, team solution, rational expectations, schedule competition, behavioral traders

Suggested Citation

Vives, Xavier, Endogenous Public Information and Welfare (October 21, 2011). IESE Business School Working Paper No. 925, Available at SSRN: https://ssrn.com/abstract=1947311 or http://dx.doi.org/10.2139/ssrn.1947311

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

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