Efficient Usle of Information and Social Value of Information

Joint with: George-Marios Angeletos

This paper analyzes equilibrium and welfare for a tractable class of economies with externalities, strategic complementarity or substitutability, and incomplete information. First, we characterize the equilibrium use of information; the key result is that complementarity heightens the sensitivity of equilibrium actions to public noise relative to private, while the converse is true for substitutability. Next, we define and characterize an efficiency benchmark designed to address whether such heightened sensitivity is socially undesirable; the key result is that the efficient use of information trades off aggregate volatility for cross-sectional dispersion. Finally, we examine the social value of information, that is, the comparative statics of equilibrium welfare with respect to the information structure; the key result is that the latter is determined by the relation between the equilibrium and efficient use of information. We conclude with a few applications, including production externalities, beauty contests, Keynesian frictions, inefficient

fluctuations, and large Cournot and Bertrand games.

For more information, contact Steve Matthews.