Information Aggregation with Costly Information Acquisition

Spyros Galanis and Sergei Mikhalishchev

Papers from arXiv.org

Abstract: We study information aggregation in a dynamic trading model with partially informed traders. Ostrovsky [2012] showed that 'separable' securities aggregate information in all equilibria, however, separability is not robust to small changes in the traders' private information. To remedy this problem, we enhance the model by allowing traders to acquire signals with cost $\kappa$, in every period. We show that '$\kappa$ separable securities' aggregate information and, as the cost decreases, nearly all securities become $\kappa$ separable, irrespective of the traders' initial private information. Moreover, the switch to $\kappa$ separability happens not gradually but discontinuously, hence even a small decrease in costs can result in a security aggregating information. Finally, even with myopic traders, cheaper information may accelerate or decelerate information aggregation for all but Arrow-Debreu securities.

Date: 2024-06, Revised 2024-11
New Economics Papers: this item is included in nep-des and nep-mic
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