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Revealing information &- or not &- in a social network of traders

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  • Allmis, Patrick
  • Pin, Paolo
  • Vega-Redondo, Fernando

Abstract

We propose a simple micro-founded model of trading with ex-ante asymmetric information similar to one proposed by Kyle (1985) in which the equilibrium price is fully revealing under rational expectations. We analyze under which conditions a privately informed trader may want to share her information with other traders for free. Despite the strictly competitive setupand conventional wisdom, we show that there is a unique separating equilibrium in which the informed trader reveals some signals and conceals others. A consequence of this is that the price need not be fully revealing of the aggregate information in the market (even if traders are risk neutral), which in turn has welfare implications on the distribution of the social surplusat equilibrium. We establish these results for a context where the pattern of communication among traders is restricted by a given social network, studying as well what network arises when links are established endogenously.

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  • Allmis, Patrick & Pin, Paolo & Vega-Redondo, Fernando, 2024. "Revealing information &- or not &- in a social network of traders," UC3M Working papers. Economics 43966, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:43966
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    References listed on IDEAS

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    1. Zhao, Jingang, 2001. "A characterization for the negative welfare effects of cost reduction in Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 455-469, March.
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