Efficiency Implications of Knowledge Generation: Private Versus Public Firms

Abstract

We provide an equilibrium analysis investigating efficiency differences between private and public firms’ information generation strategies, emphasizing public firms’ unique ability to learn additional information from financial markets through the feedback effect. The public firm features two mutually reinforcing sources of inefficiency. First, the public firm relies too much on market prices, as it does not incorporate information acquisition costs borne by market participants. Second, investors’ incentives to acquire information are too strong, as they maximize private trading profits as opposed to real efficiency. As the private firm does not face these distorted information acquisition incentives in our model, it is associated with higher real efficiency.