DP17025 (In)efficiency in Information Acquisition and Aggregation through Prices

Author(s): Alessandro Pavan, Savitar Sundaresan, Xavier Vives
Publication Date: February 2022
Keyword(s): aggregation through prices, Information Acquisition, Information externalities, team efficiency
JEL(s): D84, G14
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17025

We study the interaction between the inefficiency in the acquisition of private information and trading in financial markets. We show that, as the cost of information declines, traders over-invest in information acquisition and trade too much on their private information. We also show that, generically, there exists no policy based on the price of the financial asset and the volume of individual trades that implements efficiency in both information acquisition and trading. Such an impossibility result, however, turns into a possibility result when information acquisition is verifiable, or when taxes can be made contingent on the aggregate volume of trade.