Information, Market Power and Welfare

71 Pages Posted: 14 Sep 2021 Last revised: 17 Oct 2023

See all articles by Youcheng Lou

Youcheng Lou

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science (AMSS)

Rohit Rahi

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

Date Written: October 12, 2023

Abstract

We study the market for a risky asset in which traders are heterogeneous both in terms of their value for the asset and the information that they have about this value. Traders behave strategically and use the equilibrium price to extract information that is relevant to them. Due to adverse selection, uninformed traders are less willing than the informed to provide liquidity. We evaluate the impact of a change in the size or composition of the investor population on price informativeness, liquidity and welfare, with applications to the rise of passive investing and the adoption of ESG standards.

Keywords: Double auction, heterogeneous values, price informativeness, liquidity, passive investing, ESG investing.

JEL Classification: D82, G14

Suggested Citation

Lou, Youcheng and Rahi, Rohit, Information, Market Power and Welfare (October 12, 2023). Available at SSRN: https://ssrn.com/abstract=3922215 or http://dx.doi.org/10.2139/ssrn.3922215

Youcheng Lou

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science (AMSS) ( email )

Beijing
China

Rohit Rahi (Contact Author)

London School of Economics - Department of Finance ( email )

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

HOME PAGE: http://https://sites.google.com/lse.ac.uk/rohit-rahi

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

Houghton Street
London WC2A 2AE
United Kingdom

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