(In)efficiency in Information Acquisition and Aggregation through Prices

40 Pages Posted: 9 Feb 2022 Last revised: 2 Mar 2023

See all articles by Alessandro Pavan

Alessandro Pavan

Northwestern University

Savitar Sundaresan

Imperial College Business School

Xavier Vives

University of Navarra - IESE Business School; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Date Written: February 7, 2022

Abstract

We study inefficiency in the acquisition of private information before trading in financial markets. As the cost of information declines, traders over-invest in information acquisition and trade too much on their private information. Generically, no policy exists based on the price of the financial asset and the individual trade volume inducing efficiency in both information acquisition and trading. Such an impossibility result turns into a possibility one when information acquisition is verifiable or when taxes can be made contingent on the aggregate volume of trade. When only ad-valorem taxes are available, they should not be used.

Keywords: information acquisition, aggregation through prices, information externalities, team efficiency.

JEL Classification: D84, G14

Suggested Citation

Pavan, Alessandro and Sundaresan, Savitar and Vives, Xavier, (In)efficiency in Information Acquisition and Aggregation through Prices (February 7, 2022). IESE Business School Working Paper , Available at SSRN: https://ssrn.com/abstract=4028893 or http://dx.doi.org/10.2139/ssrn.4028893

Alessandro Pavan

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Savitar Sundaresan (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Xavier Vives

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

HOME PAGE: http://wwwapp.iese.edu/faculty/facultyDetail.asp?lang=en&prof=xv

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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