Information acquisition and welfare effect in a model of competitive financial markets by Xiaojuan Hu & Cheng-Zhong Qin

By:

Hu, Xiaojuan [author]

Contributor(s):

Qin, Cheng-Zhong [co-author]

Material type: Text

TextSeries: Economic theory ; Volume 54, number 1Heildelberg : Springer, 2013Content type:

text

Media type:

unmediated

Carrier type:

volume

ISSN:

0938-2259

Subject(s):

Information acquisition -- Welfare effect -- Financial markets

LOC classification:

HB119 ECO

Online resources:

Click here to access online

Summary: We analyze welfare effect of information acquisition for a model of competitive financial markets with diverse information and rational expectations. We show that in the fully revealing rational expectations equilibrium, each agent’s gain from trade in ex ante utility decreases as more agents become informed. An implication of the result is that market efficiency and ex ante Pareto optimality are not compatible in competitive financial markets with diverse information and rational expectations. Our result can be viewed as complementary to the Grossman paradox, which shows that market efficiency and individuals’ incentives to acquire information are not compatible. This paper is the first step in a projected exploration of welfare effect of information acquisition in models with diverse information.

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Holdings
Item type	Current library	Call number	Vol info	Copy number	Status	Notes	Date due	Barcode
Journal Article	Main Library - Special Collections	HB119 ECO (Browse shelf(Opens below))	vol. 54, no. 1 (pages 199-210)	SP21036	Not for loan	For In house Use

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We analyze welfare effect of information acquisition for a model of competitive financial markets with diverse information and rational expectations. We show that in the fully revealing rational expectations equilibrium, each agent’s gain from trade in ex ante utility decreases as more agents become informed. An implication of the result is that market efficiency and ex ante Pareto optimality are not compatible in competitive financial markets with diverse information and rational expectations. Our result can be viewed as complementary to the Grossman paradox, which shows that market efficiency and individuals’ incentives to acquire information are not compatible. This paper is the first step in a projected exploration of welfare effect of information acquisition in models with diverse information.

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