Information and Crowding ExternalitiesEconomic Theory (2006)
AbstractWe analyze a model in which agents have to make a binary choice under incomplete information about the state of the world, but also care about coordination with other agents who have the same problem. In some of these situations, the larger the share choosing the same alternative, the better off are agents. In others, if too many people choose the same alternative, agents could be worse off, due to crowding externalities. Agents receive public and private information about the state of the world. We determine whether agents rely more on private or public information, and whether or not their choice behavior is socially efficient. We characterize existence conditions for equilibria in which either all available information, or only the public information is used for decisions, compare the two equilibria in terms of welfare, and analyze comparative static effects of better information. Surprisingly, increasing signal accuracy may be welfare decreasing.
Publication DateApril, 2006
Citation InformationMattias K Polborn. "Information and Crowding Externalities" Economic Theory Vol. 27 (2006)
Available at: http://works.bepress.com/polborn/9/