Efficiency and welfare with complementaries & asymmetric information
By: George-Marios Angeletos [and] Alessandro Pavan
Contributors: Pavan, Alessandro; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 05-29; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 05-29.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Number of pages: 30
Description: This paper examines equilibrium and welfare in a tractable class of economies with externalities, strategic complementarity or substitutability, and incomplete information. In equilibrium, complementarity amplifies aggregate volatility by increasing the sensitivity of actions to public information; substitutability raises cross-sectional dispersion by increasing the sensitivity to private information. To address whether these effects are undesirable from a welfare perspective, we characterize the socially optimal degree of coordination and the efficient use of information. We show how efficient allocations depend on the primitives of the environment, how they compare to equilibrium, and how they can be understood in terms of a social trade-off between volatility and dispersion. We next examine the social value of information in equilibrium. When the equilibrium is efficient, welfare necessarily increases with the accuracy of information; and it increases [decreases] with the extent to which information is common if and only if agents' actions are strategic complements [substitutes]. When the equilibrium is inefficient, additional effects emerge as information affects the gap between equilibrium and efficient allocations. We conclude with a few applications, including production externalities, Keynesian frictions, inefficient fluctuations, and efficient market competition. Keywords: Social value of information, coordination, externalities, transparency. JEL Classifications: C72, D62, D82.
Notes: "October 31, 2005"--Cover.

Includes bibliographical references (p. 28-30).

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