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Learning in crowded markets

Kondor, Peter and Zawadowski, Adam (2016) Learning in crowded markets. Financial Markets Group Discussion Papers (774). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2016 The Authors
Divisions: Finance
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited: 02 Jun 2023 10:21
Last Modified: 16 Sep 2023 00:01

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