Information aggregation and equilibrium multiplicity
Subtitle: Morris-Shin meets Grossman-Stiglitz
By: [by] George-Marios Angeletos [and] Ivan Werning
Contributors: Werning, Ivǹ; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-14; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-14.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Number of pages: 30
Description: 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 Classifications: D8, E5, F3, G1.
Notes: "February 2004."

Includes bibliographical references (p. 29-30).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.