E ffi ciency and Welfare in Economies with Incomplete Information ∗

This paper examines a class of economies with externalities, strategic complementarity or substitutability, and incomplete information. We first characterize efficient allocations and compare them to equilibrium. We show how the optimal degree of coordination and the efficient use of information depend on the primitives of the environment, and how this relates to the welfare losses due to volatility and heterogeneity. We next examine the social value of information in equilibrium. When the equilibrium is efficient, welfare increases with the transparency of information if and only if agents’ actions are strategic complements. When the equilibrium is inefficient, additional effects are introduced by the interaction of externalities and information. We conclude with a few applications, including investment complementarities, inefficient fluctuations, and market competition.