Transparency of information and coordination in economies with investment complementarities
By: [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 04-07; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-07.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Number of pages: 13
Description: How do public and private information affect equilibrium allocations and social welfare in economies with investment complementarities? And what is the optimal transparency in the information conveyed, for example, by economic statistics, policy announcements, or news in the media? We first consider an environment where the complementarities are weak so that the equilibrium is unique no matter the structure of information. An increase in the precision of public information may have the perverse effect of increasing aggregate volatility. Nevertheless, as long as there is no value to lotteries, welfare unambiguously increases with an increase in either the relative or the absolute precision of public information. Hence, full transparency is optimal. 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, constructive ambiguity becomes optimal if there is a high risk that more transparency will lead to coordination failures. Keywords: Coordination, investment, welfare, information, constructive ambiguity, policy. JEL Classifications: D6, D8, E6.
Notes: "January 2004."

Includes bibliographical references (leaves 12-13).

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