Social Networks, Information Acquisition, and Asset Prices
Management Science, 2013, 59(6), 1444-1457
43 Pages Posted: 18 Mar 2011 Last revised: 21 Jun 2016
Date Written: March 15, 2011
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.
Keywords: social communication, price informativeness, information acquisition, asset prices, liquidity, volume, welfare
JEL Classification: G14, G12, G11, D82
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