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Information Aggregation via Contracting

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  • JIASUN LI

Abstract

When a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project's profit? We show that a simple contract dividing profits in proportion to investors' risk tolerances may facilitate information aggregation by altering investors' risk‐taking incentives when they decide on how investment strategies respond to private information. Our results provide a contracting‐based approach for information aggregation, which is an alternative to learning from endogenous market variables (e.g., prices) via contingent schedules as seen in well‐known rational expectations equilibrium models.

Suggested Citation

  • Jiasun Li, 2023. "Information Aggregation via Contracting," Journal of Finance, American Finance Association, vol. 78(2), pages 935-965, April.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:2:p:935-965
    DOI: 10.1111/jofi.13205
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    References listed on IDEAS

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