Econometrica: Sep 2009, Volume 77, Issue 5

Information Percolation With Equilibrium Search Dynamics

https://doi.org/10.3982/ECTA8160
p. 1513-1574

Darrell Duffie, Semyon Malamud, Gustavo Manso

We solve for the equilibrium dynamics of information sharing in a large population. Each agent is endowed with signals regarding the likely outcome of a random variable of common concern. Individuals choose the effort with which they search for others from whom they can gather additional information. When two agents meet, they share their information. The information gathered is further shared at subsequent meetings, and so on. Equilibria exist in which agents search maximally until they acquire sufficient information precision and then search minimally. A tax whose proceeds are used to subsidize the costs of search improves information sharing and can, in some cases, increase welfare. On the other hand, endowing agents with public signals reduces information sharing and can, in some cases, decrease welfare.

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