The Law of Large Demand for Information

18 Pages Posted: 25 Mar 2002

See all articles by Giuseppe Moscarini

Giuseppe Moscarini

Cowles Foundation for Research in Economics; Yale University - Department of Economics

Lones Smith

University of Wisconsin at Madison - Department of Economics

Multiple version iconThere are 2 versions of this paper

Abstract

An unresolved problem in Bayesian decision theory is how to value and price information. This paper resolves both problems by assuming inexpensive information. Building on Large Deviation Theory, we produce a generically complete asymptotic order on samples of i.i.d. signals in finite-state, finite-action Bayesian models.

We then extend this order from the 'total' to the 'marginal value of information' --- i.e. the value of an additional signal. We show that it is eventually exponentially falling in quantity, and is higher for lower quality signals. We exploit this result to provide a precise formula for the information demand, valid at low prices:

q=[log p+(1/2)log (-log p)]C + D

where the constants C and D depend on the underlying signal, and D also depends on preferences. So demand is logarithmic, falling in the price, and falling in the signal quality for a given price.

JEL Classification: D83, L86

Suggested Citation

Moscarini, Giuseppe and Smith, Lones, The Law of Large Demand for Information. Available at SSRN: https://ssrn.com/abstract=300080 or http://dx.doi.org/10.2139/ssrn.300080

Giuseppe Moscarini

Cowles Foundation for Research in Economics ( email )

Box 208281
New Haven, CT 06520-8281
United States

HOME PAGE: http://economics.yale.edu/people/giuseppe-moscarini

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3596 (Phone)

HOME PAGE: http://www.econ.yale.edu/~mosca/mosca.html

Lones Smith (Contact Author)

University of Wisconsin at Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States
608-263-3871 (Phone)
608-262-2033 (Fax)

HOME PAGE: http://www.lonessmith.com

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