Sentiments

This paper develops a new theory of fluctuations—one that helps accommodate the notions of “animal spirits” and “market sentiment” in unique‐equilibrium, rational‐expectations, macroeconomic models. To this goal, we limit the communication that is embedded in a neoclassical economy by allowing trading to be random and decentralized. We then show that the business cycle may be driven by a certain type of extrinsic shocks which we call sentiments. These shocks formalize shifts in expectations of economic activity without shifts in the underlying preferences and technologies; they are akin to sunspots, but operate in unique‐equilibrium models. We further show how communication may help propagate these shocks in a way that resembles the spread of fads and rumors and that gives rise to boom‐and‐bust phenomena. We finally illustrate the quantitative potential of our insights within a variant of the RBC model.     

POLICY WITH DISPERSED INFORMATION

Information regarding economic fundamentals is widely dispersed in society, is only imperfectly aggregated through prices or other indicators of aggregate activity, and cannot be centralized by the government or any other institution. In this paper we seek to identify policies that can improve the decentralized use of such dispersed information without requiring the government to observe this information. We show that this can be achieved by appropriately designing the contingency of taxation on ex post public information regarding the realized fundamentals and aggregate activity. When information is common (as in the Ramsey literature) or when agents have private information only about idiosyncratic shocks (as in the Mirrlees literature), the contingency on fundamentals alone suffices for efficiency. When instead agents have private information about aggregate shocks, the contingency on aggregate activity is crucial. An appropriate combination of the two contingencies permits the government to: (i) dampen the impact of noise and hence reduce non-fundamental volatility, without also dampening the impact of fundamentals; (ii) induce agents to internalize informational externalities, and hence improve the speed of social learning; (iii) restore a certain form of constrained efficiency in the decentralized use of information; and (iv) guarantee that welfare increases with the provision of any additional information. (JEL: C72, D62, D82)     

Dynamic Global Games of Regime Change: Learning,Multiplicity, and the Timing of Attacks

Global games of regime change—coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attack it—have been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing agents to take actions in many periods and to learn about the underlying fundamentals over time. We first provide a simple recursive algorithm for the characterization of monotone equilibria. We then show how the interaction of the knowledge that the regime survived past attacks with the arrival of information over time, or with changes in fundamentals, leads to interesting equilibrium properties. First, multiplicity may obtain under the same conditions on exogenous information that guarantee uniqueness in the static benchmark. Second, fundamentals may predict the eventual fate of the regime but not the timing or the number of attacks. Finally, equilibrium dynamics can alternate between phases of tranquility—where no attack is possible—and phases of distress—where a large attack can occur—even without changes in fundamentals.     

Commitment vs. Flexibility

We study the optimal trade‐off between commitment and flexibility in a consump‐ tion–savings model. Individuals expect to receive relevant information regarding tastes and thus they value the flexibility provided by larger choice sets. On the other hand, they also expect to suffer from temptation, with or without self‐control, and thus they value the commitment afforded by smaller choice sets. The optimal commitment problem we study is to find the best subset of the individual's budget set. This problem leads to a principal–agent formulation. We find that imposing a minimum level of savings is always a feature of the solution. Necessary and sufficient conditions are derived for minimum‐savings policies to completely characterize the solution. We also discuss other applications, such as the design of fiscal constitutions, the problem faced by a paternalist, and externalities.     

Efficient Use of Information and Social Value of Information

This paper analyzes equilibrium and welfare for a tractable class of economies (games) that have externalities, strategic complementarity or substitutability, and heterogeneous information. First, we characterize the equilibrium use of information: complementarity heightens the sensitivity of equilibrium actions to public information, raising aggregate volatility, whereas substitutability heightens the sensitivity to private information, raising cross‐sectional dispersion. Next, we define and characterize an efficiency benchmark designed to address whether the equilibrium use of information is optimal from a social perspective; the efficient use of information reflects the social value of aligning choices across agents. Finally, we examine the comparative statics of equilibrium welfare with respect to the information structure; the social value of information is best understood by classifying economies according to the inefficiency, if any, in the equilibrium use of information. We conclude with a few applications, including production externalities, beauty contests, business cycles, and large Cournot and Bertrand games.