Information-based Trade

Joint with: Philip Bond

We study the possibility of trade for purely informational reasons. We depart from previous analyses (e.g. Grossman and Stiglitz 1980 and Milgrom and Stokey 1982) by allowing the final payoff of the asset being traded to depend on an action taken by its eventual owner. We characterize conditions under which equilibria with trade exist. We demonstrate that our model also applies to a portfolio allocation setting, and use our results to show that trade is possible whenever there is sufficient uncertainty about market betas.

For more information, contact Jan Eeckhout.