sc8 Ee-2013-Llosa-Venkateswaran PDF

Introduction The model Price setting Policy Final remarks Appendix
Eciency with Endogenous Information Choice

G. Llosa (Profuturo - Centrum) V. Venkateswaran (NYU Stern)
Encuentro de Economistas BCRP, Lima
Octubre 2013
Llosa and Venkateswaran () Eciency 2013 1 / 38
Information and eciency
Exogenous information :
Hellwig (2005), Angeletos and Pavan (2007), Angeletos and LaO (2009).
Social versus private incentives to coordinate
This paper: Endogenous information.
Social versus private incentives to learn
Information and eciency
Exogenous information :
Hellwig (2005), Angeletos and Pavan (2007), Angeletos and LaO (2009).
Social versus private incentives to coordinate
This paper: Endogenous information.
Social versus private incentives to learn
Environment
1 Microfounded, general equilibrium business cycle model
2 Imperfectly competitive rms making price/quantity decisions
3 Uncertainty about aggregate shocks (real or nominal)
4 Costly private information
Preview of Results
Two sources of ineciency
Suboptimality of information use
Excess sensitivity to private signals Over-acquisition.
Market power
Private value of information < social value Under-acquisition
Preview of Results
Two sources of ineciency
Suboptimality of information use
Excess sensitivity to private signals Over-acquisition.
Market power
Private value of information < social value Under-acquisition
Preview of Results
Implications
Eciency of business cycles
Suboptimal information choice suboptimal uctuations
Policy
Correcting market power distortions
Also changes incentives to learn
Can lead to lower welfare.
Optimal policy
Public information
Can crowd out private information and reduce welfare
Preview of Results
Implications
Policy
Optimal policy
Public information
Preview of Results
Implications
Policy
Optimal policy
Public information
Related Literature
Exogeneous information
Morris and Shin(2002), Woodford (2003), Roca (2010), Hellwig (2005), Angeletos
and Pavan (2007), Angeletos and LaO (2009)...
Endogeneous information
Grossman and Stiglitz (1980), Hellwig and Veldkamp (2009), Mackowiak and
Wiederholt (2009, 2011), Colombo et. al. (2012), Amador and Weill (2009) ....
Choice under uncertainty
Weitzman (1972), Reis (2006)...
Eciency under monopolistic competition
Dixit and Stiglitz (1977), Grossman and Helpman (1991), Bilbiie, Ghironi and
Melitz (2008)...
Outline
1 A business cycle model
2 Quantity (labor input) choice
3 Price choice
4 Policy
Preferences and technology
Final good producer : Y
t
=
_
_
1
0
Y
1
it
di
_
1
> 1
Entrepeneurs : U
it
= C
it
N
it
()
P
t
C
it
= P
it
Y
it
Y
it
= A
t
N
1
it
> 1
Quantity equation : P
t
Y
t
= M.
Shocks : a
t
= ln A
t
~ N
_
0,
2
a
_
t
=
_
_
1
0
Y
1
it
di
_
1
> 1
Entrepeneurs : U
it
= C
it
N
it
()
P
t
C
it
= P
it
Y
it
Y
it
= A
t
N
1
it
> 1
t
Y
t
= M.
Shocks : a
t
= ln A
t
~ N
_
0,
2
a
_
t
=
_
_
1
0
Y
1
it
di
_
1
> 1
Entrepeneurs : U
it
= C
it
N
it
()
P
t
C
it
= P
it
Y
it
Y
it
= A
t
N
1
it
> 1
t
Y
t
= M.
Shocks : a
t
= ln A
t
~ N
_
0,
2
a
_
t
=
_
_
1
0
Y
1
it
di
_
1
> 1
Entrepeneurs : U
it
= C
it
N
it
()
P
t
C
it
= P
it
Y
it
Y
it
= A
t
N
1
it
> 1
t
Y
t
= M.
Shocks : a
t
= ln A
t
~ N
_
0,
2
a
_
t
=
_
_
1
0
Y
1
it
di
_
1
> 1
Entrepeneurs : U
it
= C
it
N
it
()
P
t
C
it
= P
it
Y
it
Y
it
= A
t
N
1
it
> 1
t
Y
t
= M.
Shocks : a
t
= ln A
t
~ N
_
0,
2
a
_
t
=
_
_
1
0
Y
1
it
di
_
1
> 1
Entrepeneurs : U
it
= C
it
N
it
()
P
t
C
it
= P
it
Y
it
Y
it
= A
t
N
1
it
> 1
t
Y
t
= M.
Shocks : a
t
= ln A
t
~ N
_
0,
2
a
_
Information
A private signal :
s
it
= a
t
+e
it
e
it
~ N(0,
2
i
)
Entrepreneur i chooses
2
i
at a (utility) cost (
2
i
) :
U
it
= C
it
N
it
(
2
i
) where
/
< 0
//
< 0
Assumption : () is such that the solution is in the interior
Information
A private signal :
s
it
= a
t
+e
it
e
it
~ N(0,
2
i
)
2
i
2
i
) :
U
it
= C
it
N
it
(
2
i
) where
/
< 0
//
< 0
Information
A private signal :
s
it
= a
t
+e
it
e
it
~ N(0,
2
i
)
2
i
2
i
) :
U
it
= C
it
N
it
(
2
i
) where
/
< 0
//
< 0
Timing
Each period has three stages :
Stage I : Each entrepreneur i chooses
2
i
taking as given
2
i
Stage II : Signals are realized and quantity/price decisions made
Stage III : Production, consumption and market clearing
Quantity (labor input) choice
Stage II : Entrepreneur i chooses N
i
,
it
= max
N
it
E
it
_
P
it
P
t
A
t
N
1
it
_
N
it
, where E
it
() = E([s
it
) .
Stage I : Entrepreneur i chooses
2
i
to maximize ex-ante utility,
max
2
i
it
_
2
i
,
2
i
_
2
i
_
, where

it
= E
it
.
it
2
i
=
/
(
2
i
).
Quantity (labor input) choice
Stage II : Entrepreneur i chooses N
i
,
it
= max
N
it
E
it
_
P
it
P
t
A
t
N
1
it
_
N
it
, where E
it
() = E([s
it
) .
2
i
to maximize ex-ante utility,
max
2
i
it
_
2
i
,
2
i
_
2
i
_
, where

it
= E
it
.
it
2
i
=
/
(
2
i
).
Equilibrium
Symmetric equilibrium:
2
i
=
2
\ i .
Labor input (in logs) :
n
it
=
n
+
n
s
it
,
n
=
_

1
_
_
_

2
a
2
a
+
2
_
1+(1)
(1)
_
_
_
> 0.
Information choice :
_
2
i
_
2
i
=
2
=
1
2
_
1
_

2
n
=
/
(
2
).
Equilibrium
2
i
=
2
\ i .
n
it
=
n
+
n
s
it
,
n
=
_

1
_
_
_

2
a
2
a
+
2
_
1+(1)
(1)
_
_
_
> 0.
_
2
i
_
2
i
=
2
=
1
2
_
1
_

2
n
=
/
(
2
).
Equilibrium
2
i
=
2
\ i .
n
it
=
n
+
n
s
it
,
n
=
_

1
_
_
_

2
a
2
a
+
2
_
1+(1)
(1)
_
_
_
> 0.
_
2
i
_
2
i
=
2
=
1
2
_
1
_

2
n
=
/
(
2
).
Eciency of information use
Information-constrained planner
max
n
,
n
E
t1
_
1
0
(C
it
N
it
) di ,
Solution :
+
n
=
n
,
+
n
=
n
+
_

1
_
ln
_

1
_
Implications (Angeletos and LaO, 2009) :
Constrained ecient uctuations under exogenous information
Level distortion (disappears as )
max
n
,
n
E
t1
_
1
0
(C
it
N
it
) di ,
Solution :
+
n
=
n
,
+
n
=
n
+
_

1
_
ln
_

1
_
max
n
,
n
E
t1
_
1
0
(C
it
N
it
) di ,
Solution :
+
n
=
n
,
+
n
=
n
+
_

1
_
ln
_

1
_
Eciency of information choice
Utility maximizing level of precision :
max
2
E
t1
_
1
0
(C
it
N
it
) di
. .
U(
2
)
2
_
.
First order condition :
U
2
=
1
2
_
1 +
1
_
U
2
n
=
/
(
2
).
Utility maximizing level of precision :
max
2
E
t1
_
1
0
(C
it
N
it
) di
. .
U(
2
)
2
_
.
U
2
=
1
2
_
1 +
1
_
U
2
n
=
/
(
2
).
The private value of information is less than its social value, i.e.
U
2
=
_
1 +

( 1) ( 1)
_
_
2
i
_
2
i
=
2
.
Under-acquisition of information in equilibrium
Ineciency vanishes as .
U
2
=
_
1 +

( 1) ( 1)
_
_
2
i
_
2
i
=
2
.
U
2
=
_
1 +

( 1) ( 1)
_
_
2
i
_
2
i
=
2
.
Intuition
Details
Intuition
Details
Intuition
Details
Implications
Constrained eciency of uctuations
Exogenous
2
Ecient
n
Endogenous
2
Suboptimally low
n
Public information exacerbates this ineciency can even reduce
welfare
Optimal policy : revenue subsidy

1
Nominal price setting
Stage II : Entrepreneur i chooses P
i
it
= max
P
it
E
it
_
Y
t
P
1
t
_
P
1
it
E
it
_
P
t
Y
t
A
t
_
P
it
.
2
i
to maximize ante-utility,
max
2
i
it
_
2
i
,
2
i
_
2
i
_
, where

it
= E
t1
it
.
it
2
i
=
/
(
2
i
).
Equilibrium
Symmetric equilibrium
2
i
=
2
\ i .
Nominal prices (in logs) :
p
it
=
p
+
p
s
it
,
p
=
_

1
_
_
_

2
a
2
a
+
2
_
1+(1)
1
_
_
_
< 0
_
2
i
_
2
i
=
2
=
_
1
2
_

2
p
=
/
(
2
).
max
p
,
p
E
t1
_
1
0
(C
it
N
it
) di ,
Solution :
+
p
=
_

1
_
_

2
a
2
a
+
_
1+
1
_
2
_
>
p
,
+
p
=
p
(
+
p
)
_
1
1
_
ln
_

1
_
.
Uncertainty about others actions Marginal cost uncertainty
This eect not internalized in equilibrium excess sensitivity
Higher worsens this ineciency
max
p
,
p
E
t1
_
1
0
(C
it
N
it
) di ,
Solution :
+
p
=
_

1
_
_

2
a
2
a
+
_
1+
1
_
2
_
>
p
,
+
p
=
p
(
+
p
)
_
1
1
_
ln
_

1
_
.
Uncertainty about others actions Marginal cost uncertainty
This eect not internalized in equilibrium excess sensitivity
Higher worsens this ineciency
max
2
E
t1
_
1
0
(C
it
N
it
) di
. .
U(
2
)
2
_
.
U
2
=
/
(
2
).
The private value of information can be higher or lower than the social
value, i.e.
U
2
>
<
_
2
i
_
2
i
=
2
== Over- or under-acquisition of information
Two opposing eects :
Monopoly power lowers private value under-acquisition
Inecient use lowers social value over-acquisition
Larger values of second eect dominates over-acquisition
The private value of information can be higher or lower than the social
value, i.e.
U
2
>
<
_
2
i
_
2
i
=
2
== Over- or under-acquisition of information
Two opposing eects :
Monopoly power lowers private value under-acquisition
Inecient use lowers social value over-acquisition
Larger values of second eect dominates over-acquisition
Fiscal Policy
Constant revenue subsidy :
=

1
Quantity choice constrained eciency
Price setting can reduce welfare
Eect of subsidy under price setting
Eect of subsidy under price setting
Optimal policy under price setting
State-contingent revenue subsidy :
A
t
where
=

+
p
p
1 < 0,
=
_

1
_
exp
_
2
a
_
2
+
p

_
2
_
corrects ineciency in information use.
Market power correction as before, adjusted for level eects of .
Other results
Robustness
Labor markets, risk aversion
Nominal shocks
Qualitatively the same
Details
Beauty contest-model
Eciency in information use ,== eciency in information choice
Details
Final remarks
A novel source of ineciency
Feedback of ex-post ineciencies into information choice
Policies also aect extent of learning
Next steps: other shocks and signals, quantitative evaluation
Monopolist
Consumer : CS =

1
Q
1
PQ > 1
Monopolist : = PQ N ,
Q = AN
1
Social surplus : U = CS + =

1
PQ N
Shocks : a
t
= ln A
t
~ N
_
0,
2
a
_
Information : s = a +e e ~ N(0,
2
)
Ineciency of information choice
dEU
d
2
=
_

1

1
1
1
1
_
dE
d
2
<
dE
d
2
Market power reduces the incentives to learn (==too high
2
).
Monopolist is not compensated enough under-acquisition.
Back
Nominal shocks
Shocks : A
t
=

A
m
t
= ln M
t
~ N
_
0,
2
m
_
Information : s
it
= m
t
+e
it
e
it
~ N
_
0,
2
m
_
Intermediate goods producer solves
it
= max
P
it
E
it
_
P
it
P
t
_
1
Y
t

_
_
P
it
P
t
_
Y
t
A
_
The same as before:

1 Monopoly power and inecient use.
2 Over- or under-acquisition, depending on parameters
Back
A Beauty-Contest Model
Private and social payos
i
= (x
i
Z)
2
(x
i
x)
2
U =
+
_
(x
i
Z)
2
di
+
_
(x
i
x)
2
di
where
Z ~ N(0,
2
z
) x =
_
x
i
di
,
+
, ,
+
> 0
Private signal
s
i
= Z +e
i
e
i
~ N(0,
2
i
)
Utility cost of information
(
2
i
)
Equilibrium
Best response
x
i
=
eq
s
i
=
_

2
z
2
z
+ ( + )
2
_
s
i
Information choice
_
i
(
2
i
,
2
i
)
2
i
_
2
i
=
2
i
= ( + ) (
eq
)
2
=
/
(
2
)
Ecient use
Symmetric response rule
x
+
i
=
+
s
i
=
_

+
2
z
2
z
+ (
+
+
+
)
2
_
s
i
Eciency in information use
eq
=
+
==

=

+
+
Eciency in information choice
d

U
d
2
=
d

d
2
i
__
+
+
+
+
_
2
eq
+
1
__
Ineciency of information choice
Suppose
+
+
+
= + but
eq
>
+
d

U
d
2
=
d

d
2
i
_
1 2
eq
+
1
__
>
d

d
2
i
= Over-acquisition .
Suppose
+
+
+
< + but
eq
=
+
d

U
d
2
=
d

d
2
i
_
+
+
+
+
_
>
d

d
2
i
= Over-acquisition .
Back

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Introduction The model Price setting Policy Final remarks Appendix

Eciency with Endogenous Information Choice

The same as before:

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