abstract

A rational-expectations equilibrium with positive demand for financial information does exist under fully revealing asset price, contrary to a wide-held conjecture. Whereas a continuum of investors is inconsistent with fully revealing equilibrium, finitely many investors with average portfolios demand information in equilibrium if they can adjust portfolio size in an additive-signal return model. More information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off. Under fully revealing price, information market equilibria both with and without information acquisition are Pareto efficient.

jel: D82, D83, G14

Journal of Economic Theory 2007, 133(1): 467-83 [doi html]

background

• cesifo working paper [1295] version
• abbreviated version for publication [working paper 238k]
  (Gaussian random variables only)
• full version [pdf 314k]
  (distributions with moment generating functions)