Trade-Off ? What Trade-Off: Information Production without Illiquidity

Thierry Foucault, Kostas Koufopoulos and Roman Kozhan
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Thierry Foucault: HEC Paris
Kostas Koufopoulos: University of Sussex Business School
Roman Kozhan: University of Warwick - Warwick Business School

No 1619, HEC Research Papers Series from HEC Paris

Abstract: Private information in financial markets improves the informativeness of asset prices and thereby guides resource allocation. However, informed trading generates rents at the expense of uninformed traders, creating a trade-off between price informativeness and liquidity. In addition, private incentives to acquire information need not align with the value of that information for agents who rely on prices to make decisions. We show that this trade-off can be eliminated by a market structure that separates information production from liquidity provision. In such a structure, prices remain fully informative while liquidity is preserved, and private incentives to acquire information align with its value for decision-makers.

Keywords: Asymmetric information; Optimal mechanism; Information production; Initial Price Offerings (search for similar items in EconPapers)
JEL-codes: D82 G20 G32 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2025-04-01
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1619

DOI: 10.2139/ssrn.6301699

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