The Social Value of Information with an Endogenous Public Signal

I analyse the equilibrium and welfare properties of an economy characterised by uncertainty and payoff externalities, in a general model which nests several applications. Agents receive a private signal and an endogenous public signal, which is a noisy aggregate of individual actions. I analyse how endogenous public information, which causes an information externality, combines with payoff externalities in order to disentangle their joint effect on the agents’ use of signals. I find that agents underweight private information in a larger payoff parameter region compared to when public information is exogenous. Furthermore, with endogenous public information I find that the sign of the social value of private information may be overturned and that it is empirically more plausible that increasing the precision of the noise in the public signal decreases welfare in some applications, such as in the beauty contest, thus contributing to the transparency debate.