Information Acquisition, Price Informativeness, and Welfare

36 Pages Posted: 31 Oct 2014 Last revised: 4 Aug 2018

See all articles by Rohit Rahi

Rohit Rahi

London School of Economics - Department of Finance; London School of Economics & Political Science (LSE) - Financial Markets Group

Jean-Pierre Zigrand

London School of Economics - Department of Finance, Systemic Risk Centre, and Financial Markets Group

Date Written: July 23, 2018

Abstract

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

Rahi, Rohit and Zigrand, Jean-Pierre, Information Acquisition, Price Informativeness, and Welfare (July 23, 2018). Journal of Economic Theory (2018), 177:558–593. Available at SSRN: https://ssrn.com/abstract=2516500 or http://dx.doi.org/10.2139/ssrn.2516500

Rohit Rahi (Contact Author)

London School of Economics - Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 20 7955 7313 (Phone)
+44 20 7955 7420 (Fax)

HOME PAGE: http://vishnu.lse.ac.uk/

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Jean-Pierre Zigrand

London School of Economics - Department of Finance, Systemic Risk Centre, and Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6201 (Phone)
+44 20 7955 7420 (Fax)

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