Information Acquisition, Efficiency, and Non-Fundamental Volatility

75 Pages Posted: 24 Feb 2020 Last revised: 24 Feb 2021

Date Written: February 2020


This paper analyzes non-fundamental volatility and efficiency in a class of large games (including e.g. linear-quadratic beauty contests) that feature strategic interaction and endogenous information acquisition. We adopt the rational inattention approach to information acquisition but generalize to a large class of information costs. Agents may learn not only about exogenous states, but also about endogenous outcomes. We study how the properties of the agents’ information cost relate to the properties of equilibria in these games. We provide the necessary and sufficient conditions information costs must satisfy to guarantee zero non-fundamental volatility in equilibrium, and provide another set of necessary and sufficient conditions to guarantee equilibria are efficient. We show in particular that mutual information, the cost function typically used in the rational inattention literature, both precludes non-fundamental volatility and imposes efficiency, whereas the Fisher information cost introduced by Hébert and Woodford [2020] generates both non-fundamental volatility and inefficiency.

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Suggested Citation

Hebert, Benjamin M. and La’O, Jennifer, Information Acquisition, Efficiency, and Non-Fundamental Volatility (February 2020). NBER Working Paper No. w26771, Available at SSRN:

Benjamin M. Hebert (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Jennifer La’O

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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