DP7949 Public and Private Learning from Prices, Strategic Substitutability and Complementarity, and Equilibrium Multiplicity

Author(s): Carolina Manzano, Xavier Vives
Publication Date: August 2010
Keyword(s): Asymmetric information, Hedging, Multiplicity of equilibria, Rational expectations equilibrium, Risk exposure, Strategic complementarity, Supply information
JEL(s): D82, D83, G14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7949

We study a general static noisy rational expectations model, where investors have private information about asset payo¤s, with common and private components, and about their own exposure to an aggregate risk factor, and derive conditions for existence and uniqueness (or multiplicity) of equilibria. We find that a main driver of the characterization of equilibria is whether the actions of investors are strategic substitutes or complements. This latter property in turn is driven by the strength of a private learning channel from prices, arising from the multidimensional sources of asymmetric information, in relation to the usual public learning channel. When the private learning channel is strong (weak) in relation to the public we have strong (weak) strategic complementarity in actions and potentially multiple (unique) equilibria. The results enable a precise characterization of whether information acquisition decisions are strategic substitutes or complements. We find that the strategic substitutability in information acquisition result obtained in Grossman and Stiglitz (1980) is robust.