Equilibrium, Price Formation, and the Value of Private Information
- 1 January 1991
- journal article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 4 (1) , 1-16
- https://doi.org/10.1093/rfs/4.1.1
Abstract
An economy is analyzed in which agents first choose whether to acquire costly information about the return to a risky asset, and then choose demand functions that determine the allocation of assets. It is a well-known paradox that if agents are price-takers and prices are fully revealing, then an equilibrium with costly information acquisition does not exist. It is shown that if the price formation process is modeled explicitly and agents are not price-takers, then it is possible to have an equilibrium with fully revealing prices and costly information acquisition.Keywords
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