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Information, market power and welfare

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  • Lou, Youcheng
  • Rahi, Rohit

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.

Suggested Citation

  • Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," LSE Research Online Documents on Economics 120479, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:120479
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    File URL: http://eprints.lse.ac.uk/120479/
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    References listed on IDEAS

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    Cited by:

    1. Michail Anthropelos & Scott Robertson, 2024. "Strategic Informed Trading and the Value of Private Information," Papers 2404.08757, arXiv.org.

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    More about this item

    Keywords

    double auction; heterogeneous values; price informativeness; liquidity; passive investing; ESG investing; Double auction; Heterogeneous values; Liquidity; Price informativeness; Passive investing; grants 71971208 and 72192804; Elsevier deal;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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