Working Paper: NBER ID: w15783
Authors: Robert S. Gibbons; Richard T. Holden; Michael L. Powell
Abstract: We analyze a rational-expectations model of information acquisition and price formation in an intermediate- good market: prices and net supply are non-negative, there are no noise traders, and the intermediate good has multiple potential uses. Several of our results differ from the classic Grossman-Stiglitz approach. For example, the price mechanism is more informative at high and low prices and potentially uninformative at middle prices. Also, an informed trade by a producer of one final good amounts to a noise trade from the perspective of a producer of another final good, so (a) as the price mechanism becomes more informative for producers of one final good, it becomes less informative for producers of others, who therefore have a stronger incentive to acquire information, so information acquisition has the strategic-complements property between groups, and (b) having more producers (in multiple groups) become informed need not increase the informativeness of the price mechanism.
Keywords: Rational Expectations; Intermediate Goods; Information Acquisition; Price Formation
JEL Codes: D80; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price levels (E30) | price informativeness (G14) |
| informed trade by a producer of one final good (F16) | information utility for another group (L97) |
| information acquisition decisions of one group (D80) | incentives for the other group to acquire information (D82) |
| more producers in multiple groups becoming informed (D89) | overall informativeness of the price mechanism (D41) |