Information acquisition and welfare effect in a model of competitive financial markets

Xiaojuan Hu () and Cheng-Zhong Qin ()

Economic Theory, 2013, vol. 54, issue 1, 199-210

Abstract: We analyze welfare effect of information acquisition for a model of competitive financial markets with diverse information and rational expectations. We show that in the fully revealing rational expectations equilibrium, each agent’s gain from trade in ex ante utility decreases as more agents become informed. An implication of the result is that market efficiency and ex ante Pareto optimality are not compatible in competitive financial markets with diverse information and rational expectations. Our result can be viewed as complementary to the Grossman paradox, which shows that market efficiency and individuals’ incentives to acquire information are not compatible. This paper is the first step in a projected exploration of welfare effect of information acquisition in models with diverse information. Copyright Springer-Verlag 2013

Keywords: Fully revealing REE; Grossman paradox; Information acquisition; Market efficiency; Pareto optimality; D82; D84; G14 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s00199-012-0711-5

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