Good News and Bad News: Representation Theorems and Applications
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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Unravelling arguments show that rational agents anticipate others' strategic inferences and thus voluntarily disclose private information, which can eliminate many inefficiencies from information asymmetries.
“This can eliminate many inefficiencies that result from information asymmetries - as is shown by 'unravelling' arguments, where rational agents anticipate others' strategic inferences and thus voluntarily disclose private information (Grossman, 1981; Milgrom, 1981) - while avoiding the need for a mediator or information designer.”
From Multi-Agent Risks from Advanced AI (2025) · cites this paper as Milgrom, 1981
Cites
The Market for "Lemons": Quality Uncertainty and the Market Mechanism
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Mandatory CSR and sustainability reporting: economic analysis and literature review
Christensen, H. B., Hail, L., & Leuz, C. (2021) · Review of Accounting Studies · doi:10.1007/s11142-021-09609-5 · Cited by 1,923 · see citing works
Firm-value effects of carbon emissions and carbon disclosures
Matsumura, E. M., Prakash, R., & Vera-Muñoz, S. C. (2014) · The Accounting Review · doi:10.2308/accr-50629 · Cited by 1,681 · see citing works
The Means and End of Greenwash
Lyon, T. P., & Montgomery, A. W. (2015) · Organization & Environment · doi:10.1177/1086026615575332 · Cited by 1,636 · see citing works
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de Haan, T., Offerman, T., & Sloof, R. (2011) · Games and Economic Behavior · doi:10.1016/j.geb.2011.04.006 · Cited by 51 · see citing works
Multi-Agent Risks from Advanced AI
Hammond, L., Chan, A., Clifton, J., Hoelscher-Obermaier, J., Khan, A., McLean, E., Smith, C., Barfuss, W., Foerster, J., Gavenčiak, T., et al. (2025) · arXiv · doi:10.48550/arxiv.2502.14143 · Cited by 10 · see citing works
- Authors
- Milgrom, P. R.
- Corresponding author
- Milgrom, Paul R.
- ORCID
- Milgrom, Paul R.
- Venue
- The Bell Journal of Economics
- Publisher
- JSTOR
- Published
- 1981
- Volume
- 12
- Issue
- 2
- Pages
- 380
- ISSN
- 0361-915X (ISSN-L)
- OpenAlex
- W1542183466
- Cited by
- 3,123
- References
- 1
- Citations by year
- 2026: 112 · 2025: 177 · 2024: 134 · 2023: 121 · 2022: 110 · 2021: 122 · 2020: 116 · 2019: 120 · 2018: 126 · 2017: 140 · 2016: 126 · 2015: 120 · 2014: 114 · 2013: 117 · 2012: 114
- FWCI
- 9.20
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- The Bell Journal of Economics (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Decision Sciences › Management Science and Operations Research › Game Theory and Applications
- Social Sciences › Decision Sciences › Management Science and Operations Research › Auction Theory and Applications
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic theories and models
- Keywords
- representation theorem, information economics, principal-agent model, effort incentives, bidding behavior, tendering, signaling
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