Transparency of Information and Coordination in Economies with Investment Complementarities
15 Pages Posted: 12 Feb 2004 Last revised: 3 Jun 2010
Date Written: May 1, 2004
How does public and private information affect equilibrium and welfare in an economy with investment complementarities? And what is the optimal transparency in the information disseminated by economic data or policy announcements? When complementarities are weak so that the equilibrium is always unique, an increase in the precision of public information increases the sensitivity of aggregate economic activity with respect to common noise in market expectations and may thus increase aggregate volatility, whereas more precise private information reduces volatility. Nevertheless, welfare increases with the relative precision of public information. This is because more transparency facilitates more effective coordination, which is valuable from a social perspective. On the other hand, when complementarities are strong enough that multiple equilibria are possible, more transparency permits the market to coordinate more effectively on either the "bad" or the "good" equilibrium. In this case, the social value of public information depends on the particular equilibrium selected.
Keywords: Transparency, Ambiguity, Coordination, Information
JEL Classification: D6, D8, E5, E6.
Suggested Citation: Suggested Citation