Information Aggregation with Costly Information Acquisition

Spyros Galanis; Sergei Mikhalishchev

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arXiv · 2406.07186

Information Aggregation with Costly Information Acquisition

Spyros Galanis·Sergei Mikhalishchev

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Abstract

We study information aggregation in a dynamic trading model with partially informed traders. Ostrovsky [2012] showed that `separable' securities aggregate information in all equilibria, however, determining whether a security is separable requires knowing the exact information structure of agents. To remedy this problem, we allow traders to acquire signals with cost $\kappa$, in every period. We show that `$\kappa$ separable securities' characterize information aggregation and, as the cost decreases, almost all securities become $\kappa$ separable, irrespective of the traders' initial private information. Moreover, the switch to $\kappa$ separability happens not gradually but discontinuously, hence even a small decrease in costs can result in a security aggregating information. We provide a complete classification of securities in terms of how well they aggregate information, which surprisingly depends only on their payoff structure.

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econ.TH

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Spyros Galanis, Sergei Mikhalishchev. 2024-06-11. Information Aggregation with Costly Information Acquisition. https://arxiv.org/abs/2406.07186

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