A normalized value for information purchases

Cabrales, Antonio, Gossner, Olivier ORCID: 0000-0003-3950-0208 and Serrano, Roberto (2017) A normalized value for information purchases. Journal of Economic Theory, 170. pp. 266-288. ISSN 0022-0531

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Abstract

Consider agents who are heterogeneous in their preferences and wealth levels. These agents may acquire information prior to choosing an investment that has a property of no-arbitrage, and each piece of information bears a corresponding cost. We associate a numeric index to each information purchase (information-cost pair). This index describes the normalized value of the information purchase: it is the risk-aversion level of the unique CARA agent who is indifferent between accepting and rejecting the purchase, and it is characterized by a \duality" principle that states that agents with a stronger preference for information should engage more often in information purchases. No agent more risk-averse than the index finds it profitable to acquire the information, whereas all agents less risk-averse than the index do. Given an empirically measured range of degrees of risk aversion in a competitive economy with no-arbitrage investments, our model therefore comes close to describ-ing an inverse demand for information, by predicting what pieces of information are acquired by agents and which ones are not. Among several desirable properties, the normalized-value formula induces a complete ranking of information structures that extends Blackwell's classic ordering.

Item Type:	Article
Official URL:	https://www.journals.elsevier.com/journal-of-econo...
Additional Information:	© 2017 Elsevier Inc.
Divisions:	Mathematics
Subjects:	H Social Sciences > HF Commerce Z Bibliography. Library Science. Information Resources > ZA Information resources
Date Deposited:	27 Jun 2017 13:10
Last Modified:	12 Dec 2024 01:30
URI:	http://eprints.lse.ac.uk/id/eprint/82501

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