Working Paper: CEPR ID: DP5147
Authors: Gerard J. van den Berg
Abstract: In markets with imperfect information and heterogeneity, the information technology affects the rate at which agents meet, which in turn affects the distribution of production technologies across firms. We show that in models for such markets there are typically multiple equilibria because reservation utility levels and the lowest production technology in use affect each other. The adoption of novel information technologies may then entail a revolution in the sense of a move from an inefficient to an efficient equilibrium. Inefficient production technologies are removed even in sectors where the new information technology has only recently been introduced. The effect is much larger than a marginal comparative-statics effect on a given equilibrium. The results apply to markets for consumer products, labour, intermediate goods, and (public) institutional services.
Keywords: Heterogeneity; Imperfect Information; Informational Frictions; Internet; Price Convergence; Production Technology
JEL Codes: D43; D83; J42; L11; L15; L86; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of new information technologies (L86) | shift from inefficient to efficient equilibrium (D61) |
| shift from inefficient to efficient equilibrium (D61) | exit of low-productivity firms (J63) |
| introduction of new information technologies (L86) | changes in reservation prices (D49) |
| changes in reservation prices (D49) | survival of low-productivity firms (D25) |
| reductions in search frictions (D83) | survival of low-productivity firms (D25) |
| changes in market fundamentals (L16) | changes in beliefs among agents (D83) |
| changes in beliefs among agents (D83) | shift from inefficient to efficient equilibria (D59) |