Information inefficiency in a random linear economy model

TL;DR

This paper investigates how information inefficiency impacts a random linear economy, revealing that inefficiency expands consumption possibilities but reduces expected utility, leading to increased economic activity but decreased welfare.

Contribution

It introduces a novel analysis of information inefficiency in a linear economy model using statistical equilibria, contrasting with traditional rational consumer models.

Findings

Inefficiency increases the consumer's consumption set.

Inefficiency decreases the consumer's expected utility.

Economic activity grows despite welfare decline.

Abstract

We study the effects of introducing information inefficiency in a model for a random linear economy with a representative consumer. This is done by considering statistical, instead of classical, economic general equilibria. Employing two different approaches we show that inefficiency increases the consumption set of a consumer but decreases her expected utility. In this scenario economic activity grows while welfare shrinks, that is the opposite of the behavior obtained by considering a rational consumer.