Suppose that agents share risks in competitive markets. We show that better information makes everyone worse off if the economy has a representative agent--that is, the economy's demand for state-contingent consumption equals the demand of a hypothetical agent who owns all the economy's wealth. The representative agent, moreover, is normatively unrepresentative: although each agent dislikes information, the "representative" agent is indifferent. Although we emphasize pure exchange, our results imply that a representative-agent model might seriously misstate the welfare effects of improved information in an economy with production and risk sharing, even if it performs well otherwise.
"The auihors are grateful to Anthony Creane for pointing out an error in an earlier version of this paper.The second author is grateful to the CentER for Economíc Research at Tilburg University and the Nederlandse Organisatie voor Wetenschappelijk onderzoek (grant B46-276) for their support.
STRATEGIC INFORMATION NANIPULATION IN DUOPOLIES
ABSTAACiThis paper studíes a duopoly market in which firms are uncertaln about demand and can draw Snferences concerning market demand from observations of their production quantities and market price.We are especially interested ínChe incentlves for the fírms to experlment, or adJust thelr outputs away from myopically optlmal levels to affect the Snformativeness of the market prlce.We show that experimentation occurs if information affects future optimal actions and Sf current actions also affect information. We then develop conditions under whích experlmentation introduces íncentives for firms to elther increase or decrease output. Our primary departure from previous work on strategic ínformation transmission arises out of the fact that firms' quantities are observed in our model. As a result, experímentation allows fírms to manlpulate not the directíon Sn whlch beliefs are revised (as Sn signal-~amming models) but the extent to which belief revísion occurs. Firms will adjust initial quantities to make prices either more or Iess informative, and hence to lncrease or decrease the extent of bellef revislon, depending upon whether information has positive or negative value.We present examples showing that firms may adjust output in order to reduce the Snformativeness of market prlce.
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