Efficiency of Rational Learning with Private Information

Abstract

The paper examines the welfare properties of rational learning by privately informed riskneutral firms. It is shown that the market solution is inefficient, with firms putting too much weight on their private information and public information therefore accumulating suboptimally slowly. It might even be the case that more private information is harmful to welfare F a result that it is impossible if private information is used efficiently. Moreover, it is shown that distortionary taxation of the firms' revenues might help to overcome the underlying information externality problem. All in all, therefore, the results qualify other results obtained in the literature.