Information and Economic Behavior

The paper surveys the ways in which recognition of limitations of information available to economic agents affects the workings of the system and the way in which the propositions of economic theory need restatement. The key point is the fact that probability distributions over economic variables are conditional upon signals on other, apparently irrelevant variables; further, this information is differentially available to different individuals and requires resources to acquire and transmit. Among the economic phenomena to which the information concept is relevant are (1) the response of the system to variables other than current prices, e.g., quantities and past prices; (2) research about both engineering and markets; (3) the possible disadvantages of information-gathering; (4) the incentive to emit signals, as in advertising and the acquisition of educational credentials; (5) the development of organizations as an economy in information acquisition and their costs of coordination; and (6) the prevention of some markets from existing and the preservation of other markets through non-market activities, including the development of ethical codes. (Author).