Social Networks, Information Acquisition, and Asset Prices

Social Networks, Information Acquisition, and Asset Prices

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Article ID: iaor20133848
Volume: 59
Issue: 6
Start Page Number: 1444
End Page Number: 1457
Publication Date: Jun 2013
Journal: Management Science
Authors: ,
Keywords: information
Abstract:

We analyze a rational expectations equilibrium model to explore the implications of information networks for the financial market. When information is exogenous, social communication improves market efficiency. However, social communication crowds out information production due to traders' incentives to ‘free ride’ on informed friends and on a more informative price system. Overall, social communication hurts market efficiency when information is endogenous. The network effects on the cost of capital, liquidity, trading volume, and welfare are also sensitive to whether information is endogenous. Our analysis highlights the importance of information acquisition in examining the implications of information networks for financial markets.

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