(In)efficiency in Information Acquisition and Aggregation through Prices

Alessandro Pavan, Savitar Sundaresan and Xavier Vives

No 17025, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study inefficiency in the acquisition of private information before trading in financial markets. As the cost of information declines, traders over-invest in information acquisition and trade too much on their private information. Generically, no policy exists based on the price of the financial asset and the individual trade volume inducing efficiency in both information acquisition and trading. Such an impossibility result turns into a possibility one when information acquisition is verifiable or when taxes can be made contingent on the aggregate volume of trade. When only ad-valorem taxes are available, they should not be used.

Keywords: Information acquisition; Aggregation through prices; Information externalities; Team efficiency (search for similar items in EconPapers)
JEL-codes: D84 G14 (search for similar items in EconPapers)
Date: 2022-02
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