Optimal Public Information Dissemination – Introducing Multiplier Effects into a Generalized Beauty Contest

20.10.2015 | HWWI Research Paper | von Hendrik Hüning, Lukas Meub

We develop a two-period generalized beauty contest to study the optimal level of publicity when disclosed information is subject to multiplier effects. We build upon the static case where all agents receive a private signal about an unknown fundamental state and only a fraction of all agents receive an additional public signal. However, in our model, agents no longer act simultaneously; rather, agents informed by both signals act in the first period, while those uninformed act in the second period and learn about the public signal through a multiplier signal. We show that in the unique equilibrium of our sequential game, informed agents overreact more strongly to public signals. The optimal dissemination of public information is thus considerably lower than the static case suggests. Multiplier effects might decrease overall welfare if coordination incentives are sufficiently strong. Our results hold relevance for the optimal information policy design of public authorities.