Discussion paper

DP8437 Endogenous Public Information and Welfare in Market Games

This paper performs a welfare analysis of markets with private information in which
agents condition on prices in the rational expectations tradition. Price-contingent
strategies introduce two externalities in the use of private information: a pecuniary
externality and a learning externality. The pecuniary externality induces agents to put
too much weight on private information and in the standard case, when the allocation
role of the price prevails over its informational role, overwhelms the learning
externality which impinges in the opposite way. The price may be very informative
but at the cost of an excessive dispersion of the actions of agents. The welfare loss at
the market solution may be increasing in the precision of private information. The
analysis provides insights into optimal business cycle policy and a rationale for a
Tobin-like tax for financial transactions.

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Citation

Vives, X (2011), ‘DP8437 Endogenous Public Information and Welfare in Market Games‘, CEPR Discussion Paper No. 8437. CEPR Press, Paris & London. https://cepr.org/publications/dp8437