The Social Value of Information with an Endogenous Public Signal

Posted: 18 Apr 2017 Last revised: 7 Jun 2021

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2017

Abstract

This paper analyses the equilibrium and welfare properties of an economy characterized by uncertainty and payoff externalities using a general model that nests several applications. Agents receive a private signal and an endogenous public signal, which is a noisy aggregate of individual actions and causes an information externality. Agents in equilibrium underweight private information for a larger payoff parameter región in relation to when public information is exogenous. In addition, the socially optimal endogenous degree of coordination is lower than the socially optimal exogenous degree of coordination. The welfare effect of increasing the precision of the noise in the public signal has the same sign with endogenous or exogenous public information, but its magnitude differs. The social value of private information may be overturned in relation to when public information is exogenous: from positive to negative if agents in equilibrium coordinate more than is implied by the socially optimal exogenous degree of coordination, and the opposite if they coordinate less.

Keywords: payoff externalities, information externalities, rational expectations equilibrium, private information, welfare analysis

JEL Classification: D62, D82, G14

Suggested Citation

Bayona, Anna, The Social Value of Information with an Endogenous Public Signal (April 18, 2017). ESADE Business School Research Paper No. 264, Available at SSRN: https://ssrn.com/abstract=2954539 or http://dx.doi.org/10.2139/ssrn.2954539

Anna Bayona (Contact Author)

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

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