Social Networks, Information Acquisition, and Asset Prices
University of Toronto, Rotman School of Management
University of Toronto - Rotman School of Management
March 15, 2011
Management Science, 2013, 59(6), 1444-1457
We analyze a rational expectations equilibrium model to explore the implications of information networks for the financial market. When information is exogenous, social communication improves market efficiency. However, social communication crowds out information production due to traders' incentives to "free-ride" on informed friends and on a more informative price system. Overall, social communication hurts market efficiency when information is endogenous. The network effects on the cost of capital, liquidity, trading volume, and welfare are also sensitive to whether information is endogenous. Our analysis highlights the importance of information acquisition in examining the implications of information networks for financial markets.
Number of Pages in PDF File: 43
Keywords: social communication, price informativeness, information acquisition, asset prices, liquidity, volume, welfare
JEL Classification: G14, G12, G11, D82
Date posted: March 18, 2011 ; Last revised: June 6, 2013
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