Abstract
It is well-known that agents overreact to public information in markets characterized by strategic complementarities. We propose a simple and implementable method of alleviating the overreaction problem. Extending the beauty-contest game of Morris and Shin to a multi-region economy, we show that, under an aggregate information announcement, each agent converts purely public information into imperfect public information endogenously. This makes the agents’ beliefs dispersed and alleviates the overreaction problem. Moreover, we compare the welfare effect of the aggregate information announcement with that of a separate announcement. We find that there exist plausible situations where the aggregate information announcement is better than the separate information announcement despite reduced quality.
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We would like to thank the Co-editor, an anonymous referee, Junichiro Ishida, Ryuichiro Ishikawa, Makoto Saito, Tadashi Sekiguchi, Akihisa Shibata and Etsuro Shioji for helpful suggestions. We also thank participants of the Japanese Economic Association Spring Meeting 2011 at Kumamoto Gakuen University, and seminar participants at Hitotsubashi University, Fukuoka University, the Summer Workshop on Economic Theory, the Financial Economics Workshop and the Contract Theory Workshop for useful comments. Arato is grateful for financial support through a Grant-in-Aid for Research Activity Start-up (22830058) and for Young Scientists (B) (24730241). The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Financial Services Agency.