Are We Better-off for Working Hard?

Xuezhong (Tony) He (), Lei Shi and Marco Tolotti
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Lei Shi: Macquarie University

No 391, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: When traders are uncertain on being informed and make effort to reduce their uncertainty, we would expect an improvement in both the welfare and price efficiency. By considering the disutility of the effort, we characterize the non-cooperative information game on traders' decision of making effort through a Nash equilibrium and asset price through a noisy rational expectation equilibrium. We show that making effort to be informed is harmful for social welfare. Also improving market efficiency is always at the cost of welfare reduction. Therefore, with the disutility of making effort to reduce the uncertainty on being informed, social welfare can be improved when traders make less effort, and more importantly, social welfare and price efficiency cannot be improved simultaneously.

Keywords: Uncertainty and effort; Nash equilibrium; endogenous information; asset pricing; efficiency; and social welfare (search for similar items in EconPapers)
JEL-codes: G02 G12 G14 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2018-03-01
New Economics Papers: this item is included in nep-gth, nep-knm and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:391

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