Multi-Type Information Acquisition with Integer Trader Constraints

Abstract

We analyze information acquisition in a strategic trading model with multi-dimensional uncertainties and integer constraints on the numbers of all types of informed traders. Without these integer trader constraints, the equilibrium in information choice is unique. The introduction of the integer trader constraints leads to two key effects: the steepening best-response effect and the entry-deterrence effect.  These effects can give rise to multiple equilibria, with the number of equilibria potentially becoming arbitrarily large under certain parameters. Interestingly, asymmetric equilibria can arise in symmetric settings.  Overall, incorporating the integer trader constraints--seemingly a small departure from the traditional framework--yields novel insights into the behavior of financial markets.