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Informational Externalities and Welfare-Reducing Speculation

  • Stein, Jeremy C.

Introducing more speculators into the market for a given commodity leads to improved risk sharing but can also change the informational content of prices. This inflicts an externality on those traders already in the market, whose ability to make inferences based on current prices will be affected. In some cases, the externality is negative: the entry of new speculators lowers the informativeness of the price to existing traders. The net result can be one of price destabilization and welfare reduction. This is true even when all agents are rational, risk-averse, competitors who make the best possible use of their available information.

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File URL: http://dash.harvard.edu/bitstream/handle/1/3660740/Stein_InformationalExternalities.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3660740.

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Date of creation: 1987
Date of revision:
Publication status: Published in Journal of Political Economy -Chicago-
Handle: RePEc:hrv:faseco:3660740
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  1. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
  2. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  3. Stephen W. Salant, 1974. "Profitable speculation, price stability, and welfare," International Finance Discussion Papers 54, Board of Governors of the Federal Reserve System (U.S.).
  4. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 48(5), pages 1313-17, July.
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