CHILE

Efstathios Avdis and Sergei Glebkin

No 19496, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We introduce CHILE, an asymmetric information asset-pricing framework with general utilities and payoffs. It features a large economy (LE) with continuous-and-heterogeneous information (CHI). We apply the framework to ask how wealth inequality affects market quality. Holding the quality of private information fixed, making the rich richer and the poor poorer harms information efficiency but improves liquidity. So does making the rich more informed and the poor less informed while holding wealth fixed. With endogenous information, the above effects are reinforced. Overall, widening wealth inequality is a double-edged sword for market quality, increasing liquidity but harming information efficiency.

Date: 2024-09
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