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Dr Jekyll and Mr Hyde: Feedback and welfare when hedgers can acquire information

Jacques Olivier
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Jacques Olivier: HEC Paris

No 1469, HEC Research Papers Series from HEC Paris

Abstract: I analyze welfare in a model where information acquisition is endogenous, information has real effects, and agents are rational. Hedgers derive a private benefit from holding the asset. Information improves welfare if real efficiency gains exceed cost of acquiring information and foregone gains from trade. I show three new results. Hedgers and speculators have different incentives to acquire information. Gains from trade are lower when hedgers acquire information than when speculators do. Agents may produce less information than would be socially optimal, in which case a contract whereby a firm pays a designated market-maker to lower her spread increases welfare.

Keywords: Welfare; information; hedgers; speculators; feedback; regulation; designated market-makers (search for similar items in EconPapers)
JEL-codes: D61 D82 G12 G14 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2023-01-31
New Economics Papers: this item is included in nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1469

DOI: 10.2139/ssrn.4342867

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