Information, market power and welfare

Youcheng Lou and Rohit Rahi

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

Abstract: We study the market for a risky asset in which traders are heterogeneous both in terms of their value for the asset and the information that they have about this value. Traders behave strategically and use the equilibrium price to extract information that is relevant to them. Due to adverse selection, uninformed traders are less willing than the informed to provide liquidity. We evaluate the impact of a change in the size or composition of the investor population on price informativeness, liquidity and welfare, with applications to the rise of passive investing and the adoption of ESG standards.

Keywords: double auction; heterogeneous values; price informativeness; liquidity; passive investing; ESG investing; Double auction; Heterogeneous values; Liquidity; Price informativeness; Passive investing (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2023-12-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Economic Theory, 1, December, 2023, 214. ISSN: 1095-7235

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