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The demand for information: More heat than light |
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| Authors: | Jussi Keppo Lones Smith |
| Affiliation: | a Industrial and Operations Engineering Department, University of Michigan, 611 Tappan St., Ann Arbor, MI 48109-1220, USA b Economics Department, Yale University, 28 Hillhouse Ave., New Haven, CT 06510 Cowles Foundation and NBER c Economics Department, University of Michigan, 611 Tappan St., Ann Arbor, MI 48109-1220, USA |
| Abstract: | This paper produces a theory of value for Gaussian information with two states and two actions, tracing the solution of the option pricing formula, but for the process of beliefs. We derive explicit formulas for the value of information. The marginal value is convex and rising, concave and peaking, and finally convex and falling. As the price falls, demand is initially zero, and eventually logarithmic. Its elasticity exceeds one, and falls to zero with the price. Demand is hill-shaped in beliefs, zero at extremes. Our results approximate models where information means the sample size for weak discrete informative signals. |
| Keywords: | D81 G13 |
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