Information Acquisition, Price Informativeness, and Welfare
36 Pages Posted: 31 Oct 2014 Last revised: 4 Aug 2018
Date Written: July 23, 2018
We consider the market for a risky asset with heterogeneous valuations. Private information that agents have about their own valuation is reflected in the equilibrium price. We study the learning externalities that arise in this setting, and in particular their implications for price informativeness and welfare. When private signals are noisy, so that agents rely more on the information conveyed by prices, discouraging information gathering may be Pareto improving. Complementarities in information acquisition can lead to multiple equilibria.
Keywords: Heterogeneous valuations, information acquisition, learning externalities, welfare
JEL Classification: D82, G14
Suggested Citation: Suggested Citation