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The Two Faces of Information

Author

Listed:
  • Guillermo Ordonez

    (University of Pennsylvania)

  • Gaetano Gaballo

    (European Central Bank)

Abstract

Information is a double-edged sword. On the one hand, it increases investment efficiency when originating an asset. On the other hand, it decreases its liquidity value when trading it. We capture these two faces of information in a simple setting in which agents who invest in an asset know that they may hold it to maturity or may need to sell it beforehand because of a liquidity shock. As the efficiency of investment and the transaction value of the asset depend on how many agents acquire information there is multiple equilibria. Some of these may be inefficient, either with excessive information and insufficient liquidity or with insufficient information and inefficient investment.

Suggested Citation

  • Guillermo Ordonez & Gaetano Gaballo, 2017. "The Two Faces of Information," 2017 Meeting Papers 811, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:811
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    References listed on IDEAS

    as
    1. Campbell, Tim S & Kracaw, William A, 1980. "Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-882, September.
    2. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
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    Cited by:

    1. Cai, Zhifeng & Dong, Feng, 2023. "Public disclosure and private information acquisition: A global game approach," Journal of Economic Theory, Elsevier, vol. 210(C).
    2. Gorton, Gary & Ordoñez, Guillermo, 2022. "The supply and demand for safe assets," Journal of Monetary Economics, Elsevier, vol. 125(C), pages 132-147.
    3. Guillermo Ordonez & Daniel Neuhann & Harold Cole, 2017. "A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information," 2017 Meeting Papers 787, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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