TY - JOUR AU - Angeletos,George-Marios AU - Pavan,Alessandro TI - Efficiency and Welfare with Complementarities and Asymmetric Information JF - National Bureau of Economic Research Working Paper Series VL - No. 11826 PY - 2005 Y2 - December 2005 UR - http://www.nber.org/papers/w11826 L1 - http://www.nber.org/papers/w11826.pdf N1 - Author contact info: George-Marios Angeletos Department of Economics MIT E52-251 50 Memorial Drive Cambridge, MA 02142-1347 Tel: 617/452-3859 Fax: 617/253-1330 E-Mail: angelet@mit.edu Alessandro Pavan Northwestern University Department of Economics 2001 Sheridan Road Arthur Andersen Hall 3239 Evanston, IL 60208 E-Mail: alepavan@northwestern.edu AB - This paper examines equilibrium and welfare in a tractable class of economies with externalities, strategic complementarity or substitutability, and incomplete information. In equilibrium, complementarity amplifies aggregate volatility by increasing the sensitivity of actions to public information; substitutability raises cross-sectional dispersion by increasing the sensitivity to private information. To address whether these effects are undesirable from a welfare perspective, we characterize the socially optimal degree of coordination and the efficient use of information. We show how efficient allocations depend on the primitives of the environment, how they compare to equilibrium, and how they can be understood in terms of a social trade-off between volatility and dispersion. We next examine the social value of information in equilibrium. When the equilibrium is efficient, welfare necessarily increases with the accuracy of information; and it increases [decreases] with the extent to which information is common if and only if agents' actions are strategic complements [substitutes]. When the equilibrium is inefficient, additional effects emerge as information affects the gap between equilibrium and efficient allocations. We conclude with a few applications, including production externalities, Keynesian frictions, inefficient fluctuations, and efficient market competition. ER -