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The value of information with heterogeneous agents and partially revealing prices

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  • Juan Carlos Hatchondo

Abstract

This paper studies how the arrival of information affects welfare in a general equilibrium exchange economy with incomplete and differential information. It considers a setup in which agents differ in their attitudes toward risk. This introduces gains from trade. In equilibrium, the information sets differ across agents, i.e., they hold heterogeneous beliefs. For certain structures of primitives, the latter introduces an adverse effect on welfare. In this case, the arrival of information has opposite effects: on the one hand it weakens the adverse effect on trade, and on the other hand it strengthens the Hirshleifer effect. The first effect fosters and the second one discourages risk-sharing trades. When the first effect dominates, welfare increases upon the arrival of more precise information.

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  • Juan Carlos Hatchondo, 2005. "The value of information with heterogeneous agents and partially revealing prices," Working Paper 05-06, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:05-06
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    Cited by:

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    Keywords

    Prices;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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