Information, Interdependence, and Interaction: Where Does the Volatility Come from?

57 Pages Posted: 3 Dec 2013

See all articles by Dirk Bergemann

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Tibor Heumann

HEC Montreal

Stephen Morris

Princeton University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2, 2013

Abstract

We analyze a class of games with interdependent values and linear best responses. The payoff uncertainty is described by a multivariate normal distribution that includes the pure common and pure private value environment as special cases. We characterize the set of joint distributions over actions and states that can arise as Bayes Nash equilibrium distributions under any multivariate normally distributed signals about the payoff states. We characterize maximum aggregate volatility for a given distribution of the payoff states. We show that the maximal aggregate volatility is attained in a noise-free equilibrium in which the agents confound idiosyncratic and common components of the payoff state, and display excess response to the common component. We use a general approach to identify the critical information structures for the Bayes Nash equilibrium via the notion of Bayes correlated equilibrium, as introduced by Bergemann and Morris (2013b).

Keywords: incomplete information, Bayes correlated equilibrium, Volatility, moments restrictions, Linear best responses, Quadratic payoffs

JEL Classification: C72, C73, D43, D83

Suggested Citation

Bergemann, Dirk and Heumann, Tibor and Morris, Stephen Edward, Information, Interdependence, and Interaction: Where Does the Volatility Come from? (December 2, 2013). Cowles Foundation Discussion Paper No. 1928. Available at SSRN: https://ssrn.com/abstract=2362299 or http://dx.doi.org/10.2139/ssrn.2362299

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3592 (Phone)
203-432-2128 (Fax)

HOME PAGE: http://www.econ.yale.edu/~dirk/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Tibor Heumann

HEC Montreal ( email )

3000, Chemin de la C├┤te-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

Stephen Edward Morris

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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