Incomplete risk sharing arrangements and the value of information

Abstract

The paper constructs a theoretical framework in which the value of information in general equilibrium is determined by the interaction of two opposing mechanisms: first, more information about future random events leads to better individual decisions and, therefore, higher welfare. This is the ‘Blackwell effect’ where information has positive value. Second, more information in advance of trading limits the risk sharing opportunities in the economy and, therefore, reduces welfare. This is the ‘Hirshleifer effect’ where information has negative value. We demonstrate that in an economy with production information has positive value if the information refers to non-tradable risks; hence, such information does not destroy the Blackwell theorem. Information which refers to tradable risks may invalidate the Blackwell theorem if the consumers are highly risk averse. The critical level of relative risk aversion beyond which the value of information becomes negative is less than 0.5. Copyright Springer-Verlag Berlin Heidelberg 2003Keywords and Phrases: Value of information, General equilibrium, Risk sharing markets., JEL Classification Numbers: D8, D51, D52.,

The value of information in risk-sharing environments with unawareness

“…The value of information has also been studied in the setting of incomplete markets, where Green [1981], Hakansson et al [1982] and Eckwert and Zilcha [2003] demonstrate that, in some cases, more information is beneficial. Gottardi and Rahi [2014] show that, generically, there exists a change in information that makes everyone better off and another change that makes everyone worse off.…”

Adverse selection and the market for annuities

“…14 Eckwert and Zilcha [2003] discuss two opposing effects on the efficiency of the market. First, the above mentioned 'Hirshleifer effect' limits the risk sharing opportunities in insurance markets and thus reduces welfare.…”

Blackwell's ordering and public information

“…al. [5], and, more recently, Eckwert and Zilcha [3] and Schlee [9]. A primary question of interest has been whether Hirshleifer's result, in which the maximum possible amount of information is compared to an arbitrary instance of less information, generalizes to all possible pairs of information structures that might be ordered by their informative content.…”

“…Green [4] considers a partial equilibrium model with futures contracts but no state-contingent contracts, and hence incomplete markets, and derives sufficient conditions for an agent to prefer more information in this setting. Eckwert and Zilcha [3] consider dynamic economies with some uninsurable risk and production in which production choices are made under uncertainty about productivity, and show that more information may be beneficial by allowing superior savings behavior. Schlee [9] returns to the complete-market exchange case to seek circumstances under which the firm Pareto ranking of Hirshleifer's example generalizes to arbitrary ordered pairs of information structures.…”