On information aggregation in financial markets

Abstract

This dissertation consists of three self-contained chapters, which are ordered from oldest to youngest project. The common theme is information aggregation in financial markets. In chapter 1 (job market paper), traders possess information about a state variable that both affects an asset value and an outcome that a policy maker cares about. Information aggregation in the financial market may not be achieved because the policy reaction to prices---which affects asset values---de facto punishes the informed for trading on information. In chapter 2 (joint work with Hans Peter Grüner), traders possess information about their own preferences regarding novel consumption products, and the return on investment in new firms depends on the future aggregate demand for those firms' products. Information aggregation about the preference distribution may not be achieved due to wealth constraints of consumers, so that the capital allocation reflects the preferences of the wealthy but not necessarily future demand. Chapter 3 (joint work with Lionel Page) is an experimental project, testing whether information acquired by traders is aggregated and incorporated into financial market prices