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Informational Externalities and Welfare-Reducing Speculation

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  • Stein, Jeremy C.

Abstract

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.

Suggested Citation

  • Stein, Jeremy C., 1987. "Informational Externalities and Welfare-Reducing Speculation," Scholarly Articles 3660740, Harvard University Department of Economics.
  • Handle: RePEc:hrv:faseco:3660740
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    References listed on IDEAS

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    1. 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.
    2. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 48(5), pages 1313-1317, July.
    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. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
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