Security Price Informativeness with Delegated Traders
Trade in securities markets is conducted by agents acting for principals, using "mark-to-market" contracts whereby performance is assessed using security market prices. We endogenize contract choices, information production, informed trading, and security price informativeness. But there is a contract externality. Prices are informative only because other principals induce their agents to trade based on privately produced information. The agent-traders then have an incentive to coordinate and shirk. The market price is less informative, reducing the effectiveness of mark-to-market contracts. By using managerial discretion to vary the contract type unpredictably, principals mitigate traders' coordinated manipulation and improve price informativeness. (JEL D82, D86, G12)
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Volume (Year): 2 (2010)
Issue (Month): 4 (November)
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