Information Aggregation and Equilibrium Multiplicity: Morris-Shin Meets Grossman-Stiglitz

31 Pages Posted: 24 Mar 2004

See all articles by George-Marios Angeletos

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2004

Abstract

This paper argues that adding endogenous information aggregation to situations where coordination is important - such as riots, self-fulfilling currency crises, bank runs, debt crises or financial crashes - yields novel insights into the multiplicity of equilibria. Morris and Shin (1998) have highlighted the importance of the information structure for this question. They also show that, with exogenous information, multiplicity collapses when individuals observe fundamentals with small enough idiosyncratic noise. In the spirit of Grossman and Stiglitz (1976), we endogenize public information by allowing individuals to observe financial prices or other noisy indicators of aggregate activity. In equilibrium these indicators imperfectly aggregate disperse private information without ever inducing common knowledge. Importantly, their informativeness increases with the precision of private information. We show that multiplicity may survive and characterize the conditions under which it obtains. Interestingly, endogenous information typically reverses the limit result: multiplicity is ensured when individuals observe fundamentals with small enough idiosyncratic noise.

Keywords: Multiple equilibria, coordination, self-fulfilling expectations, speculative attacks, currency crises, bank runs, financial crashes, rational-expectations, global games.

JEL Classification: D8, E5, F3, G1

Suggested Citation

Angeletos, George-Marios and Werning, Ivan, Information Aggregation and Equilibrium Multiplicity: Morris-Shin Meets Grossman-Stiglitz (February 2004). Available at SSRN: https://ssrn.com/abstract=518282 or http://dx.doi.org/10.2139/ssrn.518282

George-Marios Angeletos (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Ivan Werning

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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HOME PAGE: http://econ-www.mit.edu/faculty/iwerning

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