Heterogenous Information Choice in General Equilibrium

Tobias Broer's webpage

Abstract: We study heterogeneous information acquisition in the dynamic equilibrium of a standard neoclassical economy. Heterogeneity in wealth holdings and labor market productivity, as in the standard  Krusell and Smith (1998) environment, implies natural heterogeneity in the incentives to acquire information about the current state of the economy that allows to predict future wages and capital returns.
This is because the savings choices of agents with low and high resources are approximately unaffected by future prices, making them unwilling to pay even low prices of information processing. Importantly,  the benefit of acquiring information is declining in the mass of informed agents, whose countercyclical savings choices make the economy less volatile and information less beneficial.
We show how, for some values of information cost, this implies that an equilibrium does not exist in the representative agent economy, while it exists with heterogeneous agents.