Learning in crowded markets

Péter Kondor and Adam Zawadowski

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study how competition among investors affects the efficiency of capital allocation, the speed of capital, and welfare. In our model, investors learn about other entrants in a fully flexible way. We find that competition increases the speed of capital, but does not necessarily improve the efficiency of capital allocation: there is persistent over- or underinvestment. As speed is a by-product of costly over-learning, increasing competition decreases welfare. We describe how the speed of capital and the level of over- or underinvestment depend on market and investor characteristics. With investors of heterogeneous skills, more sophisticated investors might harm welfare.

JEL-codes: G10 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2016-05-30
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http://eprints.lse.ac.uk/118972/ Open access version. (application/pdf)

Related works:
Journal Article: Learning in crowded markets (2019)
Working Paper: Learning in crowded markets (2019)
Working Paper: Learning in Crowded Markets (2018)
Working Paper: Learning in Crowded Markets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118972

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