Conformism and Public News
IMF Working Papers, February 1, 2011
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Bibliographic details
- Authors: Celine Rochon, Gabriel Desgranges
- Published: February 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455217939.001
Summary
- The paper studies a model where investment decisions are based on investors’ information about the unknown and endogenous return of the investment.
- Investors’ information consists of endogenously determined messages sold by financial analysts who have access to both public and private information on the return of the investment.
- The return of the investment is correlated with the aggregate investment, producing a beauty contest among analysts (a "conformism" effect).
- In equilibrium, analysts sell all the information they have to all the investors.
- There are sometimes multiple equilibria, including equilibria where the beauty contest is exacerbated.
- Because of correlation across analysts' information sources, not all the information available in the economy is transmitted to investors.
Model and mechanism
- Investment return is endogenous and unknown; analysts possess both public and private signals about that return.
- Correlation between the investment return and aggregate investment creates strategic incentives for analysts to coordinate on messages, generating a beauty-contest (conformism) dynamic.
- Analysts choose messages endogenously and sell those messages to investors; message provision and sales determine the information investors use for investment decisions.
Main results and findings
- Equilibrium behavior:
- Analysts sell all the information they have to all the investors.
- Multiple equilibria can exist.
- Some equilibria feature an exacerbated beauty contest among analysts.
- Information transmission:
- Due to correlation across analysts' information sources, not all available information in the economy is transmitted to investors.
- The beauty-contest incentives can reduce the effective dissemination of heterogenous information despite analysts selling their information.
Research metadata (as stated in the source)
- Authors: Celine Rochon, Gabriel Desgranges
- Publication date: February 1, 2011
- Series: Working Paper No. 2011/033
IMF Working Papers — Conformism and Public News by Celine Rochon and Gabriel Desgranges, February 1, 2011.