Costly Information Acquisition in Decentralized Markets: Experimental Evidence

Elena Asparouhova (), Peter Bossaerts () and Wenhao Yang ()
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Elena Asparouhova: Department of Finance, University of Utah, Salt Lake City, Utah 84112
Peter Bossaerts: Faculty of Economics, University of Cambridge, Cambridge CB3 9DD, United Kingdom
Wenhao Yang: Department of Finance, University of North Carolina at Charlotte, Charlotte, North Carolina 28223

Management Science, 2024, vol. 70, issue 12, 8833-8852

Abstract: This study tests the rationality of the decisions to purchase information, the informational efficiency of prices, and the optimality of the resulting allocations in decentralized markets with a series of laboratory experiments. The theory predicts that markets with dispersed information and natural buyers and sellers converge to a fully revealing equilibrium. It is profitable to pay for information, and as such, the Grossman-Stiglitz paradox does not emerge. Statistically significant improvements in both price efficiency and allocative efficiency are documented across trading periods. In contrast to the theory, which predicts that the higher the number of informed agents, the stronger the individual incentives to invest in information, the and the more data present the opposite result. The price of information is higher when there are fewer informed agents. The result can be explained by boundedly rational decision making.

Keywords: experimental finance; information percolation; decentralized markets (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:12:p:8833-8852

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