The Action Value of Information and the Natural Transparency Limit¤

Marc-Andreas Muendler

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: Add an opening stage of signal acquisition to a canonical portfolio choice model and let investors have rational expectations about the ensuing Walrasian equilibrium. The expected marginal utility of a signal (its action value) falls in the number of signals and turns strictly negative at a finite number because signals diminish the asset's excess return. There is a natural transparency limit at which rational investors pay to inhibit information disclosure. Prior to the limit, Financial information is a public good and justifies intervention. To instill more transparency, cutting costs of information acquisition is superior to disclosure because disclosure crowds out private information acquisition and risks a violation of the transparency limit.

Keywords: information acquisition; portfolio choice; rational expecta-tions equilibrium; informational efficiency; transparency (search for similar items in EconPapers)
Date: 2005-09-01
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Citations: View citations in EconPapers (1)

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