(In)efficiency in Information Acquisition and Aggregation through Prices

66 Pages Posted: 9 Feb 2022

See all articles by Alessandro Pavan

Alessandro Pavan

Northwestern University

Savitar Sundaresan

Imperial College Business School

Xavier Vives

University of Navarra - IESE Business School; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Date Written: February 7, 2022

Abstract

We study the interaction between the inefficiency in the acquisition of private information and trading in financial markets. We show that, as the cost of information declines, traders over-invest in information acquisition and trade too much on their private information. We also show that, generically, there exists no policy based on the price of the financial asset and the volume of individual trades that implements efficiency in both information acquisition and trading. Such an impossibility result, however, turns into a possibility result when information acquisition is verifiable, or when taxes can be made contingent on the aggregate volume of trade.

Keywords: information acquisition, aggregation through prices, information externalities, team efficiency.

JEL Classification: D84, G14

Suggested Citation

Pavan, Alessandro and Sundaresan, Savitar and Vives, Xavier, (In)efficiency in Information Acquisition and Aggregation through Prices (February 7, 2022). IESE Business School Working Paper , Available at SSRN: https://ssrn.com/abstract=4028893 or http://dx.doi.org/10.2139/ssrn.4028893

Alessandro Pavan

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Savitar Sundaresan (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Xavier Vives

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

HOME PAGE: http://wwwapp.iese.edu/faculty/facultyDetail.asp?lang=en&prof=xv

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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