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Good News and Bad News: Representation Theorems and Applications

Paul R. Milgrom
The Bell Journal of Economics
Vol. 12, No. 2 (Autumn, 1981), pp. 380-391
Published by: RAND Corporation
DOI: 10.2307/3003562
Stable URL: http://www.jstor.org/stable/3003562
Page Count: 12
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Good News and Bad News: Representation Theorems and Applications
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Abstract

This is an article about modeling methods in information economics. A notion of "favorableness" of news is introduced, characterized, and applied to four simple models. In the equilibria of these models, (1) the arrival of good news about a firm's prospects always causes its share price to rise, (2) more favorable evidence about an agent's effort leads the principal to pay a larger bonus, (3) buyers expect that any product information withheld by a salesman is unfavorable to his product, and (4) bidders figure that low bids by their competitors signal a low value for the object being sold.

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