Welfare Consequences of Information Aggregation and Optimal Market Size

Kei Kawakami

American Economic Journal: Microeconomics, 2017, vol. 9, issue 4, 303-23

Abstract: We analyze the welfare implications of information aggregation in a trading model where traders have both idiosyncratic endowment risk and asymmetric information about security payoffs. The optimal market size balances two forces: (i) the risk-sharing role of markets, which creates a positive externality amongst traders, against (ii) the information-aggregation role of prices, which leads to prices that are more correlated with security payoffs, thereby undermining the hedging function of markets. Our analysis indicates that a market with infinitely many traders may not be the right welfare benchmark in the presence of risk aversion and information aggregation.

JEL-codes: D43 D62 D82 D83 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mic.20160010
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Citations: View citations in EconPapers (5)

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Working Paper: Welfare Consequences of Information Aggregation and Optimal Market Size (2015)
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