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Equilibrium, Price Formation, and the Value of Private Information

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  • Jackson, Matthew O

Abstract

An economy is analyzed in which agents first choose whether to acquire costly information about the return to a risky asset, and then choose demand functions that determine the allocation of assets. It is a well-known paradox that if agents are price-takers and prices are fully revealing, then an equilibrium with costly information acquisition does not exist. It is shown that if the price formation process is modeled explicitly and agnets are not price-takers, then it is possible to have an equilibrium with fully revealing prices and costly information acquisition. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Jackson, Matthew O, 1991. "Equilibrium, Price Formation, and the Value of Private Information," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 1-16.
  • Handle: RePEc:oup:rfinst:v:4:y:1991:i:1:p:1-16
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    Citations

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    Cited by:

    1. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    2. James Peck & Matthew O. Jackson, 1999. "Asymmetric information in a competitive market game: Reexamining the implications of rational expectations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(3), pages 603-628.
    3. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
    4. Alessandro Citanna & Archishman Chakraborty, 1999. "Moral Hazard, Aggregate Risk and Nominal, Linear Financial Contracts," Working Papers hal-00599915, HAL.
    5. Agnes Bialecki & Eleonore Haguet & Gabriel Turinici, 2014. "Existence of an Equilibrium for Lower Semicontinuous Information Acquisition Functions," Post-Print hal-00723189, HAL.
    6. Ariadna Dumitrescu, 2003. "Imperfect Competition and Market Liquidity with a Supply Informed Trader," UFAE and IAE Working Papers 591.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    7. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, Elsevier.
    8. Sherrill Shaffer, 2011. "Strategic risk aversion," Applied Financial Economics, Taylor & Francis Journals, vol. 21(13), pages 949-956.
    9. Joel Vanden, 2015. "Noisy information and the size effect in stock returns," Annals of Finance, Springer, vol. 11(1), pages 77-107, February.
    10. Dimitri Vayanos & Jiang Wang, 2012. "Market Liquidity - Theory and Empirical Evidence," FMG Discussion Papers dp709, Financial Markets Group.
    11. Xavier Vives, 2014. "On The Possibility Of Informationally Efficient Markets," Journal of the European Economic Association, European Economic Association, vol. 12(5), pages 1200-1239, October.
    12. Marc-Andreas Muendler, 2004. "The Existence of Informationally Efficient Markets When Individuals Are Rational," CESifo Working Paper Series 1295, CESifo Group Munich.
    13. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2008. "What affects the market's ability to adjust for optimistic forecast bias? Evidence from experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 66(2), pages 358-372, May.
    14. Muendler, Marc-Andreas, 2008. "Risk-neutral investors do not acquire information," Finance Research Letters, Elsevier, vol. 5(3), pages 156-161, September.
    15. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2004. "Asset prices and informed traders' abilities: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 29(7), pages 609-626, October.
    16. Marc-Andreas Muendler, 2005. "Rational Information Choice in Financial Market Equilibrium," CESifo Working Paper Series 1436, CESifo Group Munich.
    17. Ou-Yang, Hui & Wu, Weili, 2017. "Net trade and market efficiency in Grossman and Stiglitz (1980)," Journal of Economic Theory, Elsevier, vol. 167(C), pages 75-85.
    18. Goettler, Ronald L. & Parlour, Christine A. & Rajan, Uday, 2009. "Informed traders and limit order markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 67-87, July.
    19. Muendler, Marc-Andreas, 2007. "The possibility of informationally efficient markets," Journal of Economic Theory, Elsevier, vol. 133(1), pages 467-483, March.
    20. Matthew O. Jackson & James Peck, 1993. "Costly Information Acquisition," Discussion Papers 1087, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    21. Goenka, Aditya, 2003. "Informed trading and the 'leakage' of information," Journal of Economic Theory, Elsevier, vol. 109(2), pages 360-377, April.

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