Chapter 71: Economics of Information

Viktar Fedaseyeu

Economics of information As Francis Bacon once noted, knowledge is power. The need to acquire and process information is a tremendously important part of human interactions. Economic interactions are no exception. Investors buying stocks or other securities need to analyze the quality and reliability of information supplied to them. Employers must evaluate qualifications of job applicants prior to starting a working relationship with them. Insurance companies must set premiums based on the perceived risks of the insured. Examples of this sort abound in any field of economics. The purpose of this chapter is to show that the structure of the information environment can have significant consequences for how the markets and the whole economy operate. Standard theories of competitive equilibrium usually avoid these issues by assuming that all agents have costless access to the same information. The recognition that this is a very limiting assumption is what has fueled research ...

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