Information, market power and welfare

Youcheng Lou and Rohit Rahi

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study a financial market in which agents with interdependent values bid for a risky asset. Some agents are privately informed of their own value for the asset while others seek to infer it from the equilibrium price. Due to adverse selection, uninformed agents are less willing than the informed to provide liquidity, and engage in greater bid shading when prices are more informative. While increased participation by informed agents leads to perfect competition in the limit, the market remains illiquid to some degree even with free entry of uninformed traders. The incentive to produce information is increasing in market size and is maximal in a perfectly competitive economy. Price informativeness, on the other hand, is independent of market size. Curtailing information production by one group can reduce adverse selection, and improve liquidity and welfare for all agents.

Keywords: double auction; interdependent values; market power; adverse selection; information acquisition; welfare (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2021-09-13
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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