Secret and Overt Information Acquisition in Financial Markets
51 Pages Posted: 7 May 2020 Last revised: 3 Aug 2020
Date Written: April 18, 2020
We develop a model to study the observability of investors’ information acquisition in financial markets. Relative to observable information acquisition, unobservable information acquisition leads to more information production if and only if the ratio of the information-acquisition cost to noise trading is relatively high. This information-production result has further consequences for market quality. Different information-acquisition models can generate qualitatively different results. When investors endogenously choose the observability of their information-acquisition behavior, their equilibrium choices always feature a prisoner's dilemma. Our analysis has implications for regulations on investors’ private meetings with company management and the practice of tracing investors’ digital footprints.
Keywords: Information acquisition, observability, prisoner's dilemma, regulations, digital footprints
JEL Classification: D82, G14, G18
Suggested Citation: Suggested Citation