Expert information and majority decisions

A key policy argument in favor of emissions markets (relative to command-and-control types of regulation) is their ability to aggregate dispersed information and generate price signals to guide firms' trading and abatement decisions. We investigate this argument in a multi-period model where firms receive noisy private signals about their current period emissions and privately observe their previous period emissions before this information is made public to the rest of the market. Firms respond to information by trading and abating emissions. We show that there exists a rational expectations equilibrium that fully aggregates firms' private information, justifying the policy argument in favor of emissions markets, in the absence of other frictions. We also derive predictions about how prices should be reacting to new private or public information and show that the possibility of abatement dampens the impact of shocks on prices. Finally, we show that the information aggregation result breaks down if firms' abatement costs are also private information.

Discussion

A model of gradual information disclosure

Updating Awareness and Information Aggregation

In this paper, we attempt to explain the underlying strategic incentives confronting individuals when they must make a collective decision over a set of alternatives and each has information that is decision-relevant for others. A significant literature has emerged in formal political theory over the past several years that focuses on such problems, paying particular attention, first, to the extent to which voting can be expected to aggregate committee members' information and, second, to the role of communication among committee members prior to voting. Inter alia, this literature reveals a surprisingly subtle interaction between the voting rules used to make decisions and the incentives for committee members to share information prior to voting.

Optimal allocation of MRI scan capacity among competing hospital departments

Parimutuel betting under asymmetric information

We consider a trade policy model, where the costs of the home firm are private information but can be signaled through the output levels of the firm to a foreign competitor and a home policymaker. We compute the separating equilibrium and the Bayesian Nash equilibrium, and we compare the subsidies, firms' expected profits and home government's welfare in both equilibria, for different values of the own price effect parameter. (© 2008 WILEY‐VCH Verlag GmbH & Co. KGaA, Weinheim)

This paper extends results on information advantage in Cournot oligopoly to a public good economy with uncertainty and private information where the state‐dependent utilities have a multiplicative structure. We show that in a Bayesian–Nash equilibrium where consumers’ contributions are positive in all states of nature, a consumer with superior information is rewarded with a higher ex ante expected utility. Our counter example shows that in the case where one consumer does not contribute, information disadvantage might emerge. Thus, the interiority assumption is essential to obtain our results.

Consider a homogeneous product market where firms have private information about an uncertain demand parameter and compete in quantities. We examine the convergence properties of Bayesian-Cournot equilibria as the economy is replicated and conclude that large Cournot (or almost competitive) markets do not aggregate information efficiently except possibly when the production technology exhibits constant returns to scale. Even in a competitive market there is a welfare loss with respect to the first best outcome due to incomplete information in general. Nevertheless a competitive market is efficient, taking as given the decentralized private information structure of the economy. Endogenous (and costly) information acquisition is examined and seen to imply that the market outcome always falls short of the first best level with decreasing returns to scale. The results are also shown to be robust to the addition of extra rounds of competition which allows firms to use the information revealed by past prices. Explicit closed form solutions yielding comparative static results are obtained for models characterized by quadratic payoffs and affine information structures.

Transaction costs and informational cascades in financial markets

Classical statistics as a theory of incentives

Information Aggregation, Herding, and Momentum Effects

Leveraging the knowledge of an organization is an ongoing challenge that has given rise to the field of knowledge management. Yet, despite spending enormous sums of organizational resources on Information Technology (IT) systems, executives recognize there is much more knowledge to harvest. Prediction markets are emerging as one tool to help extract this tacit knowledge and make it operational. Yet, prediction markets, like other markets, are subject to pathologies (e.g., bubbles and crashes) which compromise their accuracy and may discourage organizational use. The techniques of experimental economics were used to study the characteristics of prediction markets. Empirical data was gathered from an on-line asynchronous prediction market. Participants allocated tickets based on private information and, depending on the market type, public information indicative of how prior participants had allocated their tickets. The experimental design featured three levels of feedback (no-feedback, percentages of total allocated tickets and frequency of total allocated tickets) presented to the participants. The research supported the hypothesis that information assimilation in feedback markets is composed of two mechanisms - information collection and aggregation. These are defined as: Collection - The compilation of dispersed information - individuals using their own private information make judgments and act accordingly in the market. Aggregation - The market's judgment on the implications of this gathered information - an inductive process. This effect comes from participants integrating public information with their private information in their decision process. Information collection was studied in isolation in no feedback markets and the hypothesis that markets outperform the average of their participants was supported. The hypothesis that with the addition of feedback, the process of aggregation would be present was also supported. Aggregation was shown to create agreement in markets (as measured by entropy) and drive market results closer to correct values (the known probabilities). However, the research also supported the hypothesis that aggregation can lead to information mirages, creating a market bubble. The research showed that the presence and type of feedback can be used to modulate market performance. Adding feedback, or more informative feedback, increased the market's precision at the expense of accuracy. The research supported the hypotheses that these changes were due to the inductive aggregation process which creates agreement (increasing precision), but also occasionally generates information mirages (which reduces accuracy). The way individual participants use information to make allocations was characterized. In feedback markets the fit of participants' responses to various decision models demonstrated

There is a small, but growing, economics literature on the importance and effects of having monetary policy made by a committee, rather than by an individual. Complimenting this is an older and larger body of literature on groups in the other social sciences, particular in social psychology. This paper provides a review of some of this work, focusing on two important features of committees: the effect of their size on performance and whether or not they are more moderate than the members who make them up. Individual members of a committee acquire idiosyncratic information which the committee uses to make a decision. A result of the famous Condorcet Jury Theorem is that larger committees have more resources, in the form of more information, and are thus better than smaller ones. This result depends on individuals being willing to work as hard at gathering information when they are members of a committee as they would be willing to work if they were acting alone. The economics literature suggests that this may not hold; that individual members may have an incentive to shirk. This phenomenon of a member withholding effort is called social loading in the social pyschology literature. Studies stretching over 125 years document its existence and suggest that it becomes more important as committee size increases and that it disappears when individual members contributions can be identified and evaluated. The Condorcet Jury Theorem also depends on the committee being able to aggregate members information and on members being willing to truthfully reveal their information. An excessively formal meeting structure may cause the former to fail to hold; committee members with different objectives may cause the latter not to be true. As a result of shirking and coordination problems, smaller committees may be better than larger ones and the optimal size for a committee is an empirical issue. Committees pool members information and views, thus it seems that monetary policy made by a committee should be more moderate than monetary policy made by a single individual. However, several hundred studies demonstrate that belonging to a committee polarizes its members and, hence, committees may be more extreme than individuals. A particularly harmful form of group polarization occurs when committee members striving for consensus causes them to stop paying suffcient attention to alternative courses of action. In this case the committee may make terrible decisions that none of its members would have made on their own. The results of the literature on committee size and committee polarization suggest that the ideal monetary policy committee may not have many more than five members. It should have a well defined objective and it should publish the votes of its members. It should be structured so that members do not act as part of a group, perhaps by having short terms in office and members from outside the central bank. External scrutiny of the decision-making process should be encouraged.