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Information, market power and welfare

Youcheng Lou and Rohit Rahi

Journal of Economic Theory, 2023, vol. 214, issue C

Abstract: We study the market for a risky asset in which traders are heterogeneous both in terms of their value for the asset and the information that they have about this value. Traders behave strategically and use the equilibrium price to extract information that is relevant to them. Due to adverse selection, uninformed traders are less willing than the informed to provide liquidity. We evaluate the impact of a change in the size or composition of the investor population on price informativeness, liquidity and welfare, with applications to the rise of passive investing and the adoption of ESG standards.

Keywords: Double auction; Heterogeneous values; Price informativeness; Liquidity; Passive investing; ESG investing (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:214:y:2023:i:c:s0022053123001527

DOI: 10.1016/j.jet.2023.105756

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