Working Paper: NBER ID: w10391
Authors: Georgemarios Angeletos; Alessandro Pavan
Abstract: How do public and private information affect equilibrium allocations and social welfare in economies with investment complementarities? And what is the optimal transparency in the information conveyed, for example, by economic statistics, policy announcements, or news in the media? We first consider an environment where the complementarities are weak so that the equilibrium is unique no matter the structure of information. An increase in the precision of public information may have the perverse effect of increasing aggregate volatility. Nevertheless, as long as there is no value to lotteries, welfare unambiguously increases with an increase in either the relative or the absolute precision of public information. Hence, full transparency is optimal. This is because more transparency facilitates more effective coordination, which is valuable from a social perspective. On the other hand, when complementarities are strong enough that multiple equilibria are possible, more transparency permits the market to coordinate more effectively on either the bad or the good equilibrium. In this case, constructive ambiguity becomes optimal if there is a high risk that more transparency will lead to coordination failures.
Keywords: No keywords provided
JEL Codes: D6; D8; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased precision of public information (D89) | higher welfare (I31) |
| increased precision of public information (D89) | increased aggregate volatility (E19) |
| full transparency (G38) | enhances coordination (Y80) |
| excessive transparency (G38) | coordination failures (P11) |
| strong complementarities (D10) | adverse effects of transparency (G38) |
| market coordinates on socially desirable equilibrium (D53) | higher transparency is beneficial (G38) |
| market coordinates on undesirable equilibrium (D59) | reduced transparency may enhance welfare (D69) |