The social value of overreaction to information

Matteo Bizzarri and Daniele d'Arienzo

Papers from arXiv.org

Abstract: We study the welfare effects of overreaction to information in the form of diagnostic expectations in markets with asymmetric information, and the effect of a simple intervention in the form of a tax or a subsidy. A large enough level of overreaction is always welfare-decreasing and can rationalize a tax on financial transactions. A small degree of overreaction to private information can both increase or decrease welfare. This is because there are two competing externalities: an information externality, due to the informational role of prices, and a pecuniary externality, due to the allocative role of prices. When the information externality prevails on the pecuniary externality, the loading on private information in agents' trades is too small compared to the welfare optimum: in this case, a small degree of overreaction is welfare-improving.

Date: 2024-03
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http://arxiv.org/pdf/2403.08532 Latest version (application/pdf)

Related works:
Journal Article: 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:arx:papers:2403.08532

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