This project examines how public and private information affect equilibrium allocations and welfare in economies with strategic complementarities. It aims at providing a framework to address important questions such as: what is the optimal transparency in the information disseminated by economic statistics or announcements by policy makers? Does aggregate volatility decrease, and welfare improve, as agents privately collect more information? And, what policies may help enhance coordination by reducing non-fundamental volatility?

The main contribution is in showing how these issues can be addressed by investigating the relationship between the social value of information and coordination. When coordination is socially valuable as in the case of markets with investment complementarities or demand spillovers, an increase in the precision of public information increases welfare despite the fact that it may lead to more volatility in aggregate activity. On the contrary, when the coordination motive is not warranted from a social perspective, as in the case of asset markets that are best described as beauty contests, more transparent public information may reduce welfare, whereas more precise private information is welfare-enhancing. Similarly, constructive ambiguity is optimal when there is a high risk that more precise public information will facilitate coordination on socially undesirable outcomes, such as a currency crisis or a bank run.

The results deriving from this research are expected to be relevant for both theoretical and applied research concerning economies with strategic complementarities such as production, network or demand externalities, incomplete financial markets, and Keynesian frictions. They are also expected to play an important role in the understanding of crises phenomena, such as currency attacks, bank runs, debt crises, or political change.

Agency
National Science Foundation (NSF)
Institute
Division of Social and Economic Sciences (SES)
Type
Standard Grant (Standard)
Application #
0518810
Program Officer
Daniel H. Newlon
Project Start
Project End
Budget Start
2005-08-01
Budget End
2006-12-31
Support Year
Fiscal Year
2005
Total Cost
$43,167
Indirect Cost
Name
Northwestern University at Chicago
Department
Type
DUNS #
City
Evanston
State
IL
Country
United States
Zip Code
60201