Economics of information

Noguchi, Mitsunori
June 2000
AIP Conference Proceedings;2000, Vol. 519 Issue 1, p681
Academic Journal
The economics of information covers a wide range of topics such as insurance, stochastic equilibria, the theory of finance (e.g. option pricing), job search, etc. In this paper, we focus on an economic model in which traders are uncertain about the true characteristics of commodities and know only the probability distributions of those characteristics. The traders acquire information on those characteristics via the actual consumption in the past and are allowed to exchange the information among themselves prior to the forthcoming trade. Though optimal consumption at the preceding trade generally alters optimal consumption at the succeeding trade, it may happen that they both coincide. We call this particular type of optimal consumption an information stable equilibrium (ISE). At an ISE, the traders gain no additional information from consumption, which is significant enough to revise their optimal choice at the succeeding trade.


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