October, 2004

Does What We Don't Know Hurt Us? The Efficiency of Local Knowledge

  • Stephen Daley

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This working paper explores the efficiency implications of imperfect knowledge in prices. Search theory, necessary because prices and their distribution are unknown, is then compared with the pristine world of perfect knowledge. Through the use of agent based modeling (ABM) Dr. Daley simulates economies in which the consumer agents have perfect knowledge and compare it against two variants of local knowledge, (1) information gathered through personal search and (2) this personally gathered information combined with lagged data on the aggregated price level. A social welfare function is used to determine the relative merits of each informational regime.