The Value of Information: Disadvantageous Risk-Sharing Markets

Abstract

The narrow applicability of Blackwell's result that "more information" is desirable, lies in the fact in economic models once a signal is observed by all economic agents their opportunity sets may vary. We show that Blackwell's theorem does not hold when the feasible set of actions is signal-dependent. We find sufficient condition for the result to hold under these conditions. We also apply this result to two economic models where risk sharing markets are widespread: A model with futures markets and hedging and a model of life cycle where the lifetime horizon is a random variable. In both cases we show that in the absence of risk-sharing markets (i.e., futures markets or life insurance markets) more information is advantageous. On the other hand, when such markets are introduced we may find many cases where more information is disadvantageous to the risk-averse agents.