Advertisement

Economic Theory

, Volume 21, Issue 1, pp 43–58 | Cite as

Incomplete risk sharing arrangements and the value of information

  • Bernhard Eckwert
  • Itzhak Zilcha
Research Article

Summary.

The paper constructs a theoretical framework in which the value of information in general equilibrium is determined by the interaction of two opposing mechanisms: first, more information about future random events leads to better individual decisions and, therefore, higher welfare. This is the ‘Blackwell effect’ where information has positive value. Second, more information in advance of trading limits the risk sharing opportunities in the economy and, therefore, reduces welfare. This is the ‘Hirshleifer effect’ where information has negative value. We demonstrate that in an economy with production information has positive value if the information refers to non-tradable risks; hence, such information does not destroy the Blackwell theorem. Information which refers to tradable risks may invalidate the Blackwell theorem if the consumers are highly risk averse. The critical level of relative risk aversion beyond which the value of information becomes negative is less than 0.5.

Keywords and Phrases: Value of information, General equilibrium, Risk sharing markets. 
JEL Classification Numbers: D8, D51, D52. 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Copyright information

© Springer-Verlag Berlin Heidelberg 2003

Authors and Affiliations

  • Bernhard Eckwert
    • 1
  • Itzhak Zilcha
    • 2
  1. 1.Department of Economics, University of Bielefeld, 33501 Bielefeld, GERMANY DE
  2. 2.The Berglas School of Economics,Tel-Aviv University, Ramat Aviv, ISRAEL IL

Personalised recommendations