We study voluntary information exchange widely observed among traders in financial markets. In the context of a standard market microstructure model, based on Kyle (1984, 1985), we show that disparately informed traders are better off by exchanging information provided that they are risk averse and the market is opaque. For some parameter values, the equilibrium yields a prisoners' dilemma result in which traders hoard information even though it is beneficial for them to exchange. In the presence of interpersonal costs, which penalize those who hoard information when others disclose, information exchange can be sustained as an equilibrium outcome. Repeated interactions can also sustain, an equilibrium, information exchange.
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Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number
2006fe08.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Allen, Franklin & Gale, Douglas, 1992.
"Stock-Price Manipulation,"
Review of Financial Studies,
Oxford University Press for Society for Financial Studies, vol. 5(3), pages 503-29.
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