Costly Information Acquisition, Social Networks and Asset Prices: Experimental Evidence

60 Pages Posted: 7 Aug 2017 Last revised: 14 Nov 2018

See all articles by Edward Halim

Edward Halim

Nanyang Technological University (NTU)

Yohanes E. Riyanto

Nanyang Technological University (NTU) - Division of Economics

Nilanjan Roy

City University of Hong Kong

Date Written: November 13, 2018

Abstract

We design an experiment to study the implications of information networks for the incentive to acquire costly information, market liquidity, investors' earnings and asset price characteristics in a financial market. Social communication crowds out information production as a result of agent's temptation to free ride on the signals purchased by their neighbors. Although information exchange among traders increases trading volume, improves liquidity and enhances the ability of asset prices to reflect the available information in the market, it fails to improve price informativeness. Net earnings and social welfare are higher with information sharing due to reduced acquisition of costly signals.

Keywords: Asymmetric Information, Costly Information Acquisition, Experimental Asset Markets, Social Network, Uncertainty

JEL Classification: C92, D82, D83, G10, G14

Suggested Citation

Halim, Edward and Riyanto, Yohanes E. and Roy, Nilanjan, Costly Information Acquisition, Social Networks and Asset Prices: Experimental Evidence (November 13, 2018). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3014261 or http://dx.doi.org/10.2139/ssrn.3014261

Edward Halim

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Yohanes E. Riyanto

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

Nilanjan Roy (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://sites.google.com/site/econnr86/

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