The social value of overreaction to information

Matteo Bizzarri and d’Arienzo, Daniele

Journal of Mathematical Economics, 2024, vol. 115, issue C

Abstract: We study the welfare effects of overreaction to information in markets with asymmetric information as well as the impact of a simple intervention in the form of a tax or a subsidy on trade volume. A large enough level of overreaction is always welfare decreasing: in these situations, introducing a tax can improve welfare. However, a small degree of overreaction can increase welfare. This is because of the interplay of two competing externalities: an information externality, due to the informational role of prices, and a pecuniary externality, due to the allocative role of prices. Depending on the balance of these externalities, a trade volume subsidy may be optimal.

Keywords: Overreaction; Diagnostic expectations; Non-Bayesian learning; Taxes on financial transactions; Asymmetric information; Externalities (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: The social value of overreaction to information (2024)
Working Paper: The social value of overreaction to information (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:115:y:2024:i:c:s0304406824001277

DOI: 10.1016/j.jmateco.2024.103067

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