Informational black holes in financial markets

Ulf Axelson and Igor Makarov

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

Abstract: We study how efficient primary financial markets are in allocating capital when information about investment opportunities is dispersed across market participants. Paradoxically, the very fact that information is valuable for making real investment decisions destroys the efficiency of the market. To add to the paradox, as the number of market participants with useful information increases a growing share of them fall into an "informational black hole," making markets even less efficient. Contrary to the predictions of standard theory, social surplus and the revenues of an entrepreneur seeking financing can be decreasing in the size of the financial market, the linkage principle of Milgrom and Weber (1982) may not hold, and collusion among investors may enhance efficiency.

JEL-codes: D44 D82 G10 G20 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2016-04-01
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