Information Aggregation with Costly Information Acquisition
38 Pages Posted: 14 Sep 2023 Last revised: 19 Oct 2023
Date Written: September 12, 2023
We study information aggregation in a dynamic trading model with par- tially informed traders. Ostrovsky  showed that ‘separable’ securities aggregate information in all equilibria, however, separability is not robust to small changes in the traders’ private information. To remedy this problem, we enhance the model by allowing traders to acquire signals with cost κ, in every period. We show that ‘κ separable securities’ aggregate information and, as the cost decreases, nearly all securities become κ separable, irrespective of the traders’ initial private information. Moreover, the switch to κ separabil- ity happens not gradually but discontinuously, hence even a small decrease in costs can result in a security aggregating information. Finally, even with myopic traders, cheaper information may accelerate or decelerate information aggregation for all but Arrow-Debreu securities.
Keywords: Information Aggregation, Information Acquisition, Financial Markets, Prediction Markets
JEL Classification: C91, D82, D83, D84, G14, G41
Suggested Citation: Suggested Citation