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Information acquisition with heterogeneous valuations

Rahi, Rohit (2021) Information acquisition with heterogeneous valuations. Journal of Economic Theory, 191. ISSN 1095-7235

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Identification Number: 10.1016/j.jet.2020.105155

Abstract

We study the market for a risky asset with uncertain 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 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 acquire more information. Private information production is typically not socially optimal. In the case of two types who differ in their cost of information, we can always find a Pareto improvement that entails an increase in the aggregate amount of information, with a higher proportion produced by the low-cost type.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-e...
Additional Information: © 2020 Elsevier Inc
Divisions: Finance
Subjects: H Social Sciences > HB Economic Theory
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: 06 Nov 2020 15:57
Last Modified: 20 May 2021 02:55
URI: http://eprints.lse.ac.uk/id/eprint/107152

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