Information acquisition and welfare effect in a model of competitive financial markets (Q372365): Difference between revisions

The authors analyse the incentives to information acquisition of agents in competitive markets in rational expectations equilibrium (REE). They show a complement to a result in [\textit{S. J. Grossman}, ``On the efficiency of competitive stock markets where traders have diverse information'', J. Finance 31, 573--585 (1976; \url{doi:10.1111/j.1540-6261.1976.tb01907.x})] that indicates that incentives to acquire information are not compatible with the strong market efficiency that results in a fully revealing REE. The authors show that the more agents with diverse information get informed, the worse becomes the equilibrium, i.e. that market efficiency in a REE is incompatible with ex ante Pareto optimality.