The value of information in risk-sharing environments with unawareness

The value of information is examined in a risk-sharing environment with unawareness and complete markets. Information and awareness are symmetric among agents, who have a clear understanding of their actions and deterministic payoffs. We show with examples that public information can make some agents strictly better off at the expense of others, contrasting the standard results of Hirshleifer [1971] and Schlee [2001] that the value of public information is negative for all when risk averse agents are fully insured. We identify the source of this problem to be that, as awareness varies across states, it creates an “awareness signal” that the agents misunderstand and treat asymmetrically. As a result, risk-sharing opportunities that are available when this signal is not used, vanish when it is used. Depending on the allocation of endowments, this asymmetry makes some agents strictly better off and others strictly worse off. We identify a property, Conditional Independence, which we show is sufficient for the value of public information to be negative for all. JEL-Classifications: C70, D53, D80, D82.