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American Economic Review: Vol. 91 No. 3 (June 2001)

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The Value of Information in Efficient Risk-Sharing Arrangements

Article Citation

Schlee, Edward E. 2001. "The Value of Information in Efficient Risk-Sharing Arrangements." American Economic Review, 91(3): 509-524.

DOI: 10.1257/aer.91.3.509

Abstract

Suppose that agents share risks in competitive markets. We show that better information makes everyone worse off if the economy has a representative agent--that is, the economy's demand for state-contingent consumption equals the demand of a hypothetical agent who owns all the economy's wealth. The representative agent, moreover, is normatively unrepresentative: although each agent dislikes information, the "representative" agent is indifferent. Although we emphasize pure exchange, our results imply that a representative-agent model might seriously misstate the welfare effects of improved information in an economy with production and risk sharing, even if it performs well otherwise.

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Authors

Schlee, Edward E. (AZ State U)

JEL Classifications

D83: Search; Learning; Information and Knowledge; Communication; Belief
D81: Criteria for Decision-Making under Risk and Uncertainty


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