l'istituto italiano per gli studi filosofici e gli studi di economia

This lecture will deal primarily with the acquisition and use of
information by the individual household or firm. The primary implication
for general economic analysis is the presence of increasing
returns to scale, an old but still not well-analyzed connection.
In turn, this outcome has important implications for price theory
and for the theory of economic growth. It undermines the possibility
of perfect competition. It fits in with the idea that economic growth is
a manifestation of increasing returns, an argument which already
appeared at the beginning of Adam Smith’s Wealth of Nations, was
emphasized by Allyn Young [1928], and is now in a state of vigorous
revival under the slogan, “endogenous growth theory” [Aghion and
Howitt, 1998; Romer, 1990].
2. The use of information in decision-making
As usual in economic theory, I start with the behavior of the individual,
whether household or firm. First comes a brief review of decision-making
under uncertainty. The basic elements are the state of
nature, a complete description of the world, and the action.
The decision-maker (abbreviated DM) does not know the state of
nature but considers it to be a random variable, denoted by X, with
known probability distribution; a particular realization of X will be
denoted by x. Let p(x) = Probability (X = x), for each possible value
of x. (I use probabilities as a description of uncertainty; other
approaches have been offered.)
The range of possible actions from which DM chooses will be
denoted by A; a generic member of A is denoted by a. Since knowing
that X = x completely defines the consequences of any action, there is
a function, to be denoted by Y(a, x) which specifies the physical outcome
(income) of taking action a when the state of nature is x.
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