We show that the stock market may fail to aggregate information even if it appears to be efficient, and that the resulting decrease in the information content of prices may drastically reduce welfare. We solve a macroeconomic model in which information about fundamentals is dispersed and households make small, correlated errors when forming expectations about future productivity. As information aggregates in the market, these errors amplify and crowd out the information content of stock prices. When prices reflect less information, the conditional variance of stock returns rises, causing an increase in uncertainty and costly distortions in consumption, capital accumulation, and labor supply.

This paper presents estimates of static and dynamic general equilibrium resource allocation effects for four alternative plans for corporate and personal income tax integration in the United States. A medium-scale numerical general equilibrium model is used which integrates the U.S. tax system with consumer demand behavior by household and producer behavior by industry. Results indicate that total integration of personal and corporate taxes would yield an annual static efficiency gain of around $6 billion (1973 dollars). Partial integration plans yield less. Dynamic effects are larger, and our analysis indicates that full integration may yield gains whose present value is as large as $500 billion or about 1.0 percent of the discounted present value of the GNP stream to the U.S. economy after correction for population growth. Plans differ in their distributional impacts, although these findings depend on the nature of replacement taxes used to preserve government revenues. The size of dynamic resource allocation effects is sensitive to the choice of the replacement tax, while static gains are reasonably robust.

We present a model in which investors decide whether or to what degree they want to allow their behavior to be influenced by “market sentiment.” Investors who choose to insulate their decisions from market sentiment earn higher expected returns, but incur a small mental cost. We show that if information is moderately dispersed across investors, even a very small mental cost may result in a significant amount of sentiment in equilibrium: Individuals who choose to be swayed by sentiment increase uncertainty about the future and make it less costly for others to be swayed by sentiment as well.