Dynamic Information Aggregation and Welfare

20 Pages Posted: 1 Nov 2019

See all articles by Luca Bernardinelli

Luca Bernardinelli

affiliation not provided to SSRN

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Eberhard Mayerhofer

University of Limerick - Department of Mathematics and Statistics

Date Written: October 23, 2019

Abstract

In a market with a safe rate and a risky asset that pays a continuous dividend stream depending on a latent state of the economy, several agents make consumption and investment decisions based on public information — prices and dividends — and private signals. We obtain the equilibrium in closed form, assuming that each investor has constant absolute risk aversion. Equilibrium prices do not reveal all the private signals, but lead to the same estimate of the state of the economy that one would hypothetically obtain from the knowledge of all private signals. Accurate information leads to low volatility, ostensibly improving market efficiency. But it also reduces each agent's consumption through a decrease in the price of risk. Overall, the equilibrium reaches perfect informational efficiency at the expense of agents' welfare.

Keywords: equilibrium, rational expectations, heterogeneous information, welfare

JEL Classification: G11, G12, G15

Suggested Citation

Bernardinelli, Luca and Guasoni, Paolo and Guasoni, Paolo and Mayerhofer, Eberhard, Dynamic Information Aggregation and Welfare (October 23, 2019). Available at SSRN: https://ssrn.com/abstract=3474331 or http://dx.doi.org/10.2139/ssrn.3474331

Luca Bernardinelli

affiliation not provided to SSRN

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

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

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

Eberhard Mayerhofer

University of Limerick - Department of Mathematics and Statistics ( email )

Castletroy, Co
Limerick
Ireland

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