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(In)efficiency in Information Acquisition and Aggregation through Prices

Author

Listed:
  • Vives, Xavier
  • Pavan, Alessandro
  • Sundaresan, Savitar

Abstract

We study inefficiency in the acquisition of private information before trading in financial markets. As the cost of information declines, traders over-invest in information acquisition and trade too much on their private information. Generically, no policy exists based on the price of the financial asset and the individual trade volume inducing efficiency in both information acquisition and trading. Such an impossibility result turns into a possibility one when information acquisition is verifiable or when taxes can be made contingent on the aggregate volume of trade. When only ad-valorem taxes are available, they should not be used.

Suggested Citation

  • Vives, Xavier & Pavan, Alessandro & Sundaresan, Savitar, 2022. "(In)efficiency in Information Acquisition and Aggregation through Prices," CEPR Discussion Papers 17025, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17025
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    More about this item

    Keywords

    Information acquisition; Aggregation through prices; Information externalities; Team efficiency;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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