Information, market power and welfare

Lou, Youcheng and Rahi, Rohit ORCID: 0000-0001-6887-9160 (2023) Information, market power and welfare. Journal of Economic Theory, 214. ISSN 1095-7235

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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.

Item Type:	Article
Official URL:	https://www.sciencedirect.com/journal/journal-of-e...
Additional Information:	© 2023 The Author(s)
Divisions:	Finance
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
Date Deposited:	16 Oct 2023 11:06
Last Modified:	12 Dec 2024 03:54
URI:	http://eprints.lse.ac.uk/id/eprint/120479

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