Endogenous Alleviation of Overreaction Problem by Aggregate Information Announcement

It is well‐known that agents overreact to public information in markets characterized by strategic complementarities. We propose a simple and implementable method of alleviating the overreaction problem. Extending the beauty‐contest game of Morris and Shin to a multi‐region economy, we show that, under an aggregate information announcement, each agent converts purely public information into imperfect public information endogenously. This makes the agents’ beliefs dispersed and alleviates the overreaction problem. Moreover, we compare the welfare effect of the aggregate information announcement with that of a separate announcement. We find that there exist plausible situations where the aggregate information announcement is better than the separate information announcement despite reduced quality.