Aggregate Risk and Social Value of Information in A Production Economy

This paper examines the effect of the degree of aggregate risk on social value of information in a production economy with a stock market. If the risk is firm-specific and there is no aggregate risk, public information will be socially harmful rather than valuable when there are no new markets for signal-contingent trades. We show that this result can be extended to the economy under small aggregate risk. In this case, the welfare gain from the increase in production effieciency due to public information is dominated by the welfare loss from the reduced risk-sharing opportunities. Also, these results can be extended to the case of private information due to the property of the generically fully revealing rational expectations equilibrium. [D82]