What are the welfare effects of enhanced dissemination of public information through the media and disclosures by market participants with high public visibility? For instance, is it always desirable to have frequent and timely publications of economic statistics by government agencies and the central bank? We examine the impact of public information in a setting where agents take actions appropriate to the underlying fundamentals, but they also have a coordination motive arising from a strategic complementarity in their actions. When the agents have no private information, greater provision of public information always increases welfare. However, when agents also have access to independent sources of information, the welfare effect of increased public disclosures is ambiguous.

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Social Value of Public Information

Investor Psychology and Security Market Under- and Overreactions

Different beliefs about how fair social competition is and what determines income inequality, influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how this interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will chose low redistribution and low taxes. In equilibrium, eff ort will be high and the role of luck will be limited, in which case market outcomes will be relatively fair and social beliefs will be self-fulfilled. If instead a society believes that luck, birth, connections and/or corruption determine wealth, it will tax a lot, thus distorting allocations and making these beliefs self-sustained as well. These insights may help explain the cross-country variation in perceptions about income inequality and choices of redistributive policies.

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Fairness and redistribution

Many economic problems are naturally modeled as a game of incomplete information, where a player’s payoff depends on his own action, the actions of others, and some unknown economic fundamentals. For example, many accounts of currency attacks, bank runs, and liquidity crises give a central role to players’ uncertainty about other players’ actions. Because other players’ actions in such situations are motivated by their beliefs, the decision maker must take account of the beliefs held by other players. We know from the classic contribution of Harsanyi (1967–1968) that rational behavior in such environments not only depends on economic agents’ beliefs about economic fundamentals, but also depends on beliefs of higher-order – i.e., players’ beliefs about other players’ beliefs, players’ beliefs about other players’ beliefs about other players’ beliefs, and so on. Indeed, Mertens and Zamir (1985) have shown how one can give a complete description of the “type” of a player in an incomplete information game in terms of a full hierarchy of beliefs at all levels. In principle, optimal strategic behavior should be analyzed in the space of all possible infinite hierarchies of beliefs; however, such analysis is highly complex for players and analysts alike and is likely to prove intractable in general. It is therefore useful to identify strategic environments with incomplete information that are rich enough to capture the important role of higher-order beliefs in economic settings, but simple enough to allow tractable analysis. Global games, first studied by Carlsson and van Damme (1993a), represent one such environment. Uncertain economic fundamentals are summarized by a state θ and each player observes a different signal of the state with a small amount of noise. Assuming that the noise technology is common knowledge among the players, each player’s signal generates beliefs about fundamentals, beliefs about other players’ beliefs about fundamentals, and so on. Our purpose in this paper is to describe how such models work, how global game reasoning can be applied to economic problems, and how this analysis relates to more general analysis of higher-order beliefs in strategic settings.

/pdf/global-games-theory-and-applications-1lch3df46c.pdf

Global Games: Theory and Applications

The classical doctrine of the Lender of Last Resort, elaborated by Thornton (1802) and Bagehot (1873), asserts that the Central Bank should lend to 'illiquid but solvent' banks under certain conditions. Several authors have argued that this view is now obsolete: when interbank markets are efficient, a solvent bank cannot be illiquid. This Paper provides a possible theoretical foundation for rescuing Bagehot's view. Our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs. We build a model of banks' liquidity crises that possesses a unique Bayesian equilibrium. In this equilibrium, there is a positive probability that a solvent bank cannot find liquidity assistance in the market. We derive policy implications about banking regulation (solvency and liquidity ratios) and interventions of the Lender of Last Resort as well as on the disclosure policy of the Central Bank.

Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?

This paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs. While exogenous asymmetric information has been shown to select a unique equilibrium, we show that the endogenous information generated by policy interventions leads to multiple equilibria. The policy maker is thus trapped into a position in which self‐fulfilling expectations dictate not only the coordination outcome but also the optimal policy. This result does not rely on the freedom to choose out‐of‐equilibrium beliefs, nor on the policy being a public signal; it may obtain even if the policy is observed with idiosyncratic noise.

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Signaling in a Global Game: Coordination and Policy Traps

Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks (August 2006, with George-Marios Angeletos and Alessandro Pavan)

We explore how optimal information choices change the predictions of strategic models. When a large number of agents play a game with strategic complementarity, information choices exhibit complementarity as well: If an agent wants to do what others do, they want to know what others know. This makes heterogeneous beliefs di‐cult to sustain and may generate multiple equilibria. In models with substitutability, agents prefer to difierentiate their information choices. We use these theoretical results to examine the role of information choice in recent price-setting models and to propose modeling techniques that ensure equilibrium uniqueness.

/pdf/knowing-what-others-know-coordination-motives-in-information-4x8tg2k8bs.pdf

Knowing What Others Know: Coordination Motives in Information Acquisition

Global games of regime change-coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attack it-have been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing agents to take actions in many periods and to learn about the underlying fundamentals over time. We first provide a simple recursive algorithm for the characterization of monotone equilibria. We then show how the interaction of the knowledge that the regime survived past attacks with the arrival of information over time, or with changes in fundamentals, leads to interesting equilibrium properties. First, multiplicity may obtain under the same conditions on exogenous information that guarantee uniqueness in the static benchmark. Second, fundamentals may predict the eventual fate of the regime but not the timing or the number of attacks. Finally, equilibrium dynamics can alternate between phases of tranquility-where no attack is possible-and phases of distress-where a large attack can occur-even without changes in fundamentals.

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Dynamic global games of regime change: Learning, multiplicity, and the timing of attacks

http://www.econ.ucla.edu/people/papers/Hellwig/Hellwig206.pdf

Christian Hellwig

Papers

Signaling in a Global Game: Coordination and Policy Traps

Dynamic Global Games of Regime Change: Learning, Multiplicity and Timing of Attacks (August 2006, with George-Marios Angeletos and Alessandro Pavan)

Knowing What Others Know: Coordination Motives in Information Acquisition

Dynamic global games of regime change: Learning, multiplicity, and the timing of attacks

Public Information, Private Information, and the Multiplicity of Equilibria in Coordination Games