Illiquidity and the Value of Private Information
57 Pages Posted: 17 Jan 2016 Last revised: 15 Feb 2020
Date Written: February 14, 2020
We show two surprising consequences of introducing endogenous information acquisition into an imperfectly competitive trading model characterized by a small number of traders. First, the marginal value of private information can be negative, resulting in an equilibrium with no private-information acquisition. Second, imperfect competition typically generates information complementarity. We characterize the roles that liquidity traders play in these findings and demonstrate that several polices to improve price efficiency and market liquidity fall short in achieving the intended goals.
Keywords: \Imperfect competition, information production, excess volatility, information complementarity, adverse selection, exchange traded funds (ETFs)
JEL Classification: G11
Suggested Citation: Suggested Citation