Social Value of Public Information Author(S): Stephen Morris and Hyun Song Shin Source: the American Economic Review, Vol
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American Economic Association Social Value of Public Information Author(s): Stephen Morris and Hyun Song Shin Source: The American Economic Review, Vol. 92, No. 5 (Dec., 2002), pp. 1521-1534 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/3083261 Accessed: 31/03/2010 11:50 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=aea. 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We examine the impact of public informationin a setting where agents take actions appropriate to the underlyingfundamentals, but they also have a coordi- nation motive arising from a strategic complementarityin their actions. Whenthe agents have no socially valuable private information,greater provision of public informationalways increases welfare. However, when agents also have access to independentsources of information,the welfare effect of increased public disclo- sures is ambiguous. (JEL D82) The history of speculative bubbles begins more information is generally beneficial. This roughly with the advent of newspapers. conclusion is unaffected by whether the incre- One can assume that, although the record mental informationis public (shared by every- is of these early newspapers mostly lost, one) or private (available only to the relevant they regularly reportedon thefirst bubble the Dutch individual). of any consequence, tulipmania How far does this conclusion extend to social of the 1630s. Although the news media- and broadcast contexts where decision makers are interested newspapers, magazines, in the actions of others?Public informa- media, along with their new outlets on the parties Internet-present themselves as detached tion has attributesthat make it a double-edged observersof marketevents, they are them- instrument.On the one hand, it conveys infor- selves an integral part of these events. mation on the underlying fundamentals,but it Significantmarket events generally occur also serves as a focal point for the beliefs of the only if there is similar thinking among group as a whole. When prevailingconventional and the news me- large groups of people, wisdom or consensus impinge on dia are essential vehicles the people's for spread of decision-making process, public information ideas. serve to reinforce their on individ- Robert Shiller (2002) may impact ual decisions to the detrimentof private infor- For a decision maker facing a choice under mation. The "sunspots"literature has explored uncertainty,greater access to information per- this latter theme by emphasizing the ability of mits actions that are better suited to the circum- public signals to serve as a coordinationdevice. stances. Also, to the extent that one decision Even when the signal is "extrinsic"and has no maker's choice is made in isolation from others, direct bearing on the underlyingfundamentals, its very public nature allows full play to self- beliefs in economic out- * Yale fulfilling determining Morris:Cowles Foundation, University, P.O. Box comes. Costas Azariadis and David 208281, New Haven,CT 06520 (e-mail:stephen.morris@yale. (1981) edu); Shin: London School of Economics, Houghton Street, Cass and Karl Shell (1983) are early references. London WC2A 2AE U. K. (e-mail: [email protected]). Michael Woodford(1990) and Peter Howitt and This paper was previously circulated under the title "The R. Preston McAfee (1992) bolster the case for CNBC Effect: Welfare Effects of Public Information."We how are gratefulto JuanDubra, Tom Sargent,Frank Heinemann, sunspot equilibria by showing they may Mathias Dewatripont,Takashi Ui, and Heinz Herrmannfor arise in the context of individual learning, and theircomments on earlierversions of this paper,and to three how they arise from a variety of economic referees for their encouragement and guidance. The first mechanisms. version of this paper was preparedfor the Bundesbank/CFS However, while the extrinsic nature of sun- conferenceon "Transparencyof MonetaryPolicy," Frankfurt, allows a clean of the coordi- October2000. We also thank participantsat seminarsat the spots expression Bank of England, BIS, IMF, Pompeu Fabra, ECARES, nation role of public information,it fails to do Essex, Cambridge,and the Bank of Japanfor theircomments. justice to the fact that public informationdoes, 1521 1522 THE AMERICANECONOMIC REVIEW DECEMBER2002 in general, convey information on the funda- (i) When the agents have no private informa- mentals, and that such information will be of tion-so thatthe only source of information value to decision makers. Howitt and McAfee for the agents is the public information- note with irony that William Jevons (1884), then greater precision of the public infor- who introduced sunspots to economics, very mation always increases social welfare. much believed them to be partof the fundamen- (ii) However, if the agents have access to some tals of an agricultural economy. Indeed, for private information, it is not always the policy makers in a variety of contexts, it is the case that greaterprecision of public infor- fundamentalsinformation conveyed by public mation is desirable. Over some ranges, in- disclosures that receives all the emphasis. For creased precision of public information is instance,the proposalsto revise the 1988 accord detrimental to welfare. Specifically, the on bank capital adequacy place great emphasis greaterthe precision of the agents' private on the disclosures by banks that allow market information, the more likely it is that in- discipline to operate more effectively (Basel creased provision of public information Committee on Banking Supervision, 1999b); it lowers social welfare. is no less than the third of three "pillars"of the proposed accord. More generally, the policy The detrimentaleffect of public information response to the recent turbulence in interna- arises from the fact that the coordinationmotive tional financial markets has been to call for entails placing too much weight on the public increased transparency through disclosures signal relative to weights that would be used by from governments and other official bodies, as the social planner. The impact of public infor- well as from the major marketparticipants (see mation is large, and so is the impact of any InternationalMonetary Fund, 1998; Basel Com- noise in the public signal that inevitably creeps mittee, 1999a). Thus, assessing the social value in. In short, although public informationis ex- of public information entails recognizing its tremely effective in influencing actions, the dual role-- of conveying fundamentalsinforma- dangerarises from the fact that it is too effective tion as well as serving as a focal point for at doing so. Agents overreactto public informa- beliefs. Our task in this paper is to assess the tion, and thereby magnify the damage done by social value of public informationwhen allow- any noise. Our objective is to show how such ing for this dual role. "overreaction"need not be predicated on any Our investigation centers on a model that is wishful thinking or irrationalityon the part of reminiscent of Keynes's beauty contest exam- agents. ple, and which also shareskey featureswith the The dilemma posed by the potentialfor over- "island economy" model of Edmund Phelps reaction to public informationis a familiar one (1970) and RobertE. Lucas, Jr. (1972, 1973). A to policy makers that command high visibility large populationof agents have access to public in the market. Central bank officials have and private informationon the underlyingfun- learnedto be wary of public utterancesthat may damentals, and aim to take actions appropriate unduly influence financial markets, and have to the underlyingstate. But they also engage in developed their own respective strategies for a zero-sum race to second-guess the actions of communicatingwith the market.In formulating other individuals in which a player's prize de- their disclosure policies, centralbanks and gov- pends on the distance between his own action ernmentagencies face a numberof interrelated and the actions of others. The smaller is the issues concerning how much they should dis- distance, the greateris the prize. This impartsa close, in what form, and how often.