Heterogeneous Information and the Benefits of Transparency

Should central banks or other government agencies always commit to provide timely and accurate information about economic fundamentals? The answer to this question depends on the extent to which markets make efficient use of the available information. In this paper, I study the welfare effects of public and private information provision, when economic agents have access to heterogeneous sources of information. I first consider a monopolistic price-setting model with incomplete, heterogeneous information, in which the use of private information gives rise to a social tradeoff between output volatility and price dispersion. In equilibrium, pricing decisions undervalue the social costs of price dispersion, implying that prices rely too heavily on private information; contrary to results reported in Morris and Shin (2002), it follows that the provision of public information is always beneficial, but better private information may reduce welfare. Finally, I consider a general class of linear-quadratic interaction models, in which the use of private information gives rise to a tradeoff between the aggregate volatility and crosssectional dispersion of individual decisions, and I show how the welfare implications of public and private information provision, and the efficiency of information use depend on different types of externalities in this tradeoff. Which externalities are present in a given environment has to be determined from underlying microfoundations.