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Conformism and Public News

Author/Editor: Céline Rochon | Gabriel Desgranges
Authorized for Distribution: February 1, 2011
Electronic Access: Free Full Text (PDF file size is 914KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: We study a model where investment decisions are based on investors’ information about the unknown and endogenous return of the investment. The information of investors consists of endogenously determined messages sold by financial analysts who have access to both public and private information on the return of the investment. We assume that the return of the investment is correlated with the aggregate investment. This results into a beauty contest among analysts (or a "conformism" effect). In equilibrium, analysts sell all the information they have to all the investors. A striking result is that there are sometimes multiple equilibria. There are equilibria where the beauty contest is exacerbated. Because of the correlation across analysts'' information sources, not all the information available in the economy is transmitted to investors.
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Series: Working Paper No. 11/33
Subject(s): Economic models | Private investment
Author's keyword(s): Public Information | Asymmetric Information | Conformism | Beauty Contest
    Published:   February 1, 2011        
    ISBN/ISSN:   9781455217939/1018-5941   Format:   Paper
    Stock No:   WPIEA2011033   Pages:   26
    Price:   US$18.00
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