Economics at your fingertips  

Learning in Crowded Markets

Péter Kondor () and Adam Zawadowski

No 2018_4, CEU Working Papers from Department of Economics, Central European University

Abstract: We study a capital reallocation problem in which investors can enter into a new market where they compete with each other in identifying the best deals. While ex ante investors are uncertain about their relative advantage in identifying the best deals, they can devote costly resources to learning about their relative advantage in a fully flexible way. We find that investors might allocate too much or too little capital to the new market. Increasing competition between investors induces them to learn more, shifting the distribution of entrants towards those with a relative advantage. However, competition does not change overall entry, so it does not affect the efficiency of capital allocation. Thus, learning induced by competition turns out to be wasteful and welfare decreasing. Allowing investors to learn in a fully flexible way - as opposed to requiring Gaussian signals - is what makes our argument transparent. We study several extension.

New Economics Papers: this item is included in nep-com and nep-knm
Date: 2018-04-03
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) Full text (application/pdf)

Related works:
Working Paper: Learning in Crowded Markets (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in CEU Working Papers from Department of Economics, Central European University Contact information at EDIRC.
Bibliographic data for series maintained by Anita Apor ().

Page updated 2019-04-02
Handle: RePEc:ceu:econwp:2018_4