Microtheory: (In)efficiency in information acquisition and aggregation
Published: 14 January 2022
25 January. Professor Xavier Vives, IESE Business School, University of Navarra
Professor Xavier Vives, IESE Business School, University of Navarra
'(In)efficiency in Information Acquisition and Aggregation through Prices' (co-authored by A.Pavan and S.Sundaresan)
Tuesday 25 January, 1.00pm-2.30pm
Zoom online seminar
Abstract
The paper studies the interaction between traders’ acquisition of private information and the aggregation of information in financial markets. We consider a canonical market microstructure in which partially-informed traders compete in schedules and prices partially aggregate the traders’ private information. Before submitting their demand schedules, traders acquire information about the long-term profitability of the traded asset. We show that, when the errors in the traders’ signals are correlated, policies that induce the traders to submit the efficient schedules when the traders’ private information is exogenous do not necessarily induce them to collect the efficient amount of private information. In particular, we identify conditions under which such policies induce over-investment (alternatively, under-investment) in information acquisition, relative to what is efficient. We find that, as information technology reduces the cost of acquiring information, the economy eventually moves to a regime with excessive information acquisition. Finally, we 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 taxes can be made contingent on the aggregate volume of trade, or when the acquired information is verifiable.
Biography
Xavier Vives is professor of Economics and Finance at IESE Business School. He holds a PhD in Economics from UC Berkeley. Fellow of the Econometric Society since 1992; of the European Economic Association since 2004; and of the Academia Europaea since 2012. President of the European Association for Research in Industrial Economics for 2016-2018 and current Vicepresident-elected of the European Finance Association. He has taught at INSEAD, Harvard University, Universitat Autònoma de Barcelona, Universitat Pompeu Fabra, UC Berkeley, University of Pennsylvania, and New York University. His fields of interest are industrial organisation and regulation, banking and financial economics. He has published more than a hundred articles in the main international journals and several books, the most recent being Competition and Stability in Banking. He is currently co-editor of JEMS and former editor of JET and JEEA. Dr. Vives has served as advisor for the World Bank, the Inter-American Development Bank, the European Commission, the Federal Reserve Bank of New York, as well as for international corporations. Duisenberg Fellow of the European Central Bank in 2015 and recipient of the European Research Council Advanced Grant in 2009-2014 and 2018-2023. In 2011-2014 he was Special Advisor to the EU Commissioner for Competition, Mr Joaquín Almunia.
Further information: business-events@glasgow.ac.uk
First published: 14 January 2022
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