Information acquisition, price informativeness and welfare

We consider the market for a risky asset with heterogeneous valuations. Private information that agents have about their own valuation is reflected in the equilibrium price. We study the learning externalities that arise in this setting, and in particular their implications for price informativeness and welfare. When private signals are noisy, so that agents rely more on the information conveyed by prices, discouraging information gathering may be Pareto improving. Complementarities in information acquisition can lead to multiple equilibria

Overconfidence and Market Efficiency with Heterogeneous Agents

We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrele- vance result: when a positive fraction of rational agents (endogenously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a conse- quence the overconfidence bias does not affect informational efficiency, price volatility, ra- tional traders expected profits or their welfare. Intuitively, as overconfidence goes up, so does price informativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overcon- fident. The main intuition of the paper, if not the irrelevance result, is shown to be robust to different model specifications.partially revealing equilibria, overconfidence, rational expectations, information acquisition, price informativeness.

Insiders-outsiders, transparency and the value of the ticker

We consider a multi-period rational expectations model in which risk-averse investors differ in their information on past transaction prices (the ticker). Some investors (insiders) observe prices in real-time whereas other investors (outsiders) observe prices with a delay. As prices are informative about the asset payoff, insiders get a strictly larger expected utility than outsiders. Yet, information acquisition by one investor exerts a negative externality on other investors. Thus, investors’ average welfare is maximal when access to price information is rationed. We show that a market for price information can implement the fraction of insiders that maximizes investors’ average welfare. This market features a high price to curb excessive acquisition of ticker information. We also show that informational efficiency is greater when the dissemination of ticker information is broader and more timely

Insiders-outsiders, transparency and the value of the ticker

In this paper, the authors consider a multi-period rational expectations model in which risk-averse investors differ in their information on past transaction prices (the ticker). Some investors (insiders) observe prices in real-time whereas other investors (outsiders) observe prices with a delay.market data sale; latency; transparency; price discovery; Hirsh-leifer effect

Overconfidence and market efficiency with heterogeneous agents

We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrelevance result: when a positive fraction of rational agents (endogeneously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a consequence the overconfidence bias does not aect informational efficiency, price volatility, rational traders’ expected profits or their welfare. Intuitively, as overconfidence goes up, so does price infornativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overconfident.Partially revealing equilibria, overconfidence, rational expectations, information

Essays on Price and Welfare

This dissertation is a collection of three essays on price and welfare. The first chapter investigates the optimal price index for central banks to stabilize in a model economy where volatile prices are harmful to welfare through monetary friction. The second chapter estimates the impact of recent technological innovation, namely the internet, on the dynamics of prices and welfare through a variety of real mechanisms. The third chapter analyzes the impact of financial regulation on the prices of financial assets and the welfare of the financial market participants. There is currently a debate about what price index central banks should target when economies are open and exposed to international price shocks. Chapter 1 derives the optimal price index by solving the Ramsey problem in a New Keynesian small open economy model with an arbitrary number of sectors. This approach improves on existing theoretical benchmarks because (1) it makes an explicit distinction between the consumer price index (CPI) and the producer price index (PPI), and (2) it allows exogenous international price shocks to play a role. Qualitatively, I use the analytical expression of the optimal price index to discuss that popular indices, such as the PPI and the core/headline CPI, are suboptimal because they ignore the heterogeneity in price stickiness and the effect of inflation on the trade surplus. Quantitatively, I calibrate a 35-sector version of the model for 40 countries and show that stabilizing the optimal price index yields significantly higher welfare than alternative indices. In Chapter 2, which is joint work with Yoon J. Jo and David Weinstein, we estimate the impact of e-commerce on Japanese prices and welfare. First, we consider the possibility that e-commerce may have lowered prices by driving down the average prices of goods available online. Second, we compute the welfare gains due to the ability of e-commerce to enable consumers to purchase goods from other regions. Third, we compute the gains that arise through e-commerce's ability to arbitrage intercity price differences. We find that all three channels produced welfare gains in Japan, but our estimates suggest that the first and second channels are by far the most important, with welfare gains through these channels being eleven to sixteen times larger than through the price arbitrage channel. Overall, we find that increased inter-city arbitrage raised Japanese welfare by 0.12 percent, the gains due to new varieties available through online shopping raised welfare 0.7 percent, and the gains due to overall price reductions for goods available online raised welfare by 1 percent. In Chapter 3, which is joint work with Sakai Ando, we analyze the impact of dealer regulation on price quality (informativeness and volatility) and its implications for the welfare of market participants. We argue that although price informativeness, volatility, and the dealer's profitability all deteriorate, against conventional wisdom, other market participants are better off due to the dealer's risk-shifting motive. A static model is used to clarify the main intuition, and the robustness of the welfare results, as well as the fragility of the conventional wisdom about price quality, are discussed by incorporating dynamics and endogenizing information acquisition

Endogenous Public Information and Welfare

This paper performs a welfare analysis of economies with private information when public information is endogenously generated and agents can condition on noisy public statistics in the rational expectations tradition. Equilibrium is not (restricted) efficient even when feasible allocations share similar properties to the market context (e.g., linear in information). The reason is that the market in general does not internalize the informational externality when public statistics (e.g., prices) convey information and does not balance optimally non-fundamental volatility and the dispersion of actions. Under strategic substitutability, equilibrium prices will tend to convey too little information when the “informational” role of prices prevails over its “index of scarcity” role and too much information in the opposite case. Under strategic complementarity, prices always convey too little information. The welfare loss at the market solution may be increasing in the precision of private information. These results extend to the internal efficiency benchmark (accounting only for the collective welfare of the active players). Received results—on the relative weights placed by agents on private and public information, when the latter is exogenous—may be overturned.information externality, strategic complementarity and substitutability, asymmetric information, excess volatility, team solution, rational expectations, behavioral traders

Information acquisition with heterogeneous valuations

We study the market for a risky asset with heterogeneous valuations. Agents seek to learn about their own valuation by acquiring private information and making inferences from the equilibrium price. As agents of one type gather more information, they pull the equilibrium price closer to their valuation and further away from the valuations of other types. Thus they exert a negative learning externality on other types. This, in turn, implies that a lower cost of information for one type induces all agents to produce more information. When evaluating agents' welfare, the learning externality has to be offset against a gains from trade externality, since agents who learn less because their valuation is further away from the price also stand to profit more from trading. In equilibrium, agents' information acquisition decisions are clustered together more than is socially optimal

Public and Private Learning from Prices, Strategic Substitutability and Complementarity, and Equilibrium Multiplicity

We study a general static noisy rational expectations model, where investors have private information about asset payoffs, with common and private components, and about their own exposure to an aggregate risk factor, and derive conditions for existence and uniqueness (or multiplicity) of equilibria. We find that a main driver of the characterization of equilibria is whether the actions of investors are strategic substitutes or complements. This latter property in turn is driven by the strength of a private learning channel from prices, arising from the multidimensional sources of asymmetric information, in relation to the usual public learning channel. When the private learning channel is strong (weak) in relation to the public we have strong (weak) strategic complementarity in actions and potentially multiple (unique) equilibria. The results enable a precise characterization of whether information acquisition decisions are strategic substitutes or complements. We find that the strategic substitutability in information acquisition result obtained in Grossman and Stiglitz (1980) is robust.rational expectations equilibrium, strategic complementarity, multiplicity of equilibria, asymmetric information, risk exposure, bedging, supply information