Implications of more precise information for technological development and economic welfare

Abstract
This paper analyzes the dynamic interactions between the precision of information, technological development, and welfare within an overlapping generations model. More precise information about idiosyncratic production shocks has ambiguous effects on technological progress and welfare, which depend critically on the risk sharing capacity of the economy's financial system. Two effects, which can act in the same or in opposite directions, are at work: (i) more precise information allows agents to make better decisions but restricts the scope for risk sharing (the ‘uncertainty-related effect’) and (ii) more precise information, by changing R&D investment, may have a long-lasting effect due to the model's intertemporal production externality (the ‘externality-related effect’).


Burkhard Dreesa, 1 and Bernhard Eckwertb, ,
aIMF Institute International Monetary Fund USA
bDepartment of Economics University of Bielefeld Germany
Accepted 15 July 2009.
Available online december 2009.