Information acquisition with heterogeneous valuations

Rahi, Rohit ORCID: 0000-0001-6887-9160 (2019) Information acquisition with heterogeneous valuations. Financial Markets Group Discussion Papers (787). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We study the market for a risky asset with heterogeneous valuations. Agents seek to learn about their own valuation by acquiring private information and making inferences from the equilibrium price. As agents of one type gather more information, they pull the equilibrium price closer to their valuation and further away from the valuations of other types. Thus they exert a negative learning externality on other types. This, in turn, implies that a lower cost of information for one type induces all agents to produce more information. When evaluating agents' welfare, the learning externality has to be offset against a gains from trade externality, since agents who learn less because their valuation is further away from the price also stand to profit more from trading. In equilibrium, agents' information acquisition decisions are clustered together more than is socially optimal.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2019 The Author
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
Date Deposited:	31 May 2023 08:36
Last Modified:	01 Apr 2024 08:00
URI:	http://eprints.lse.ac.uk/id/eprint/118929

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