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Trade-Off ? What Trade-Off: Information Production without Illiquidity

Author

Listed:
  • Foucault, Thierry

    (HEC Paris)

  • Koufopoulos, Kostas

    (University of Sussex Business School)

  • Kozhan, Roman

    (University of Warwick - Warwick Business School)

Abstract

Private information in financial markets improves the informativeness of asset prices and thereby guides resource allocation. However, informed trading generates rents at the expense of uninformed traders, creating a trade-off between price informativeness and liquidity. In addition, private incentives to acquire information need not align with the value of that information for agents who rely on prices to make decisions. We show that this trade-off can be eliminated by a market structure that separates information production from liquidity provision. In such a structure, prices remain fully informative while liquidity is preserved, and private incentives to acquire information align with its value for decision-makers.

Suggested Citation

  • Foucault, Thierry & Koufopoulos, Kostas & Kozhan, Roman, 2025. "Trade-Off ? What Trade-Off: Information Production without Illiquidity," HEC Research Papers Series 1619, HEC Paris.
    • Handle: RePEc:ebg:heccah:1619
    DOI: 10.2139/ssrn.6301699
    as

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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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