TY - JOUR
T1 - Learning in crowded markets
AU - Kondor, Péter
AU - Zawadowski, Adam
N1 - Publisher Copyright:
© 2019 Elsevier Inc.
PY - 2019/11
Y1 - 2019/11
N2 - We present a novel entry-game with endogenous information acquisition to study the welfare effects of opacity and competition. Potential entrants to an opaque market are uncertain about their competitive advantage relative to other investors, i.e. their type. They construct optimal costly signals to learn about their types, where the marginal cost of learning captures the opacity of the market. In general, the individually optimal entry and learning decisions are socially suboptimal. Players over-invest in learning and more opaque markets are associated with more crowding. Nevertheless, more opaque markets might still lead to higher welfare by implying a better trade-off between the degree of crowding and the total cost of learning. Similarly, decreasing the share of smart investors in the market might also improve welfare. However, fierce competition is always detrimental to welfare as it leads to more wasteful learning without changing the level of crowding.
AB - We present a novel entry-game with endogenous information acquisition to study the welfare effects of opacity and competition. Potential entrants to an opaque market are uncertain about their competitive advantage relative to other investors, i.e. their type. They construct optimal costly signals to learn about their types, where the marginal cost of learning captures the opacity of the market. In general, the individually optimal entry and learning decisions are socially suboptimal. Players over-invest in learning and more opaque markets are associated with more crowding. Nevertheless, more opaque markets might still lead to higher welfare by implying a better trade-off between the degree of crowding and the total cost of learning. Similarly, decreasing the share of smart investors in the market might also improve welfare. However, fierce competition is always detrimental to welfare as it leads to more wasteful learning without changing the level of crowding.
KW - Crowded markets
KW - Inattention
UR - http://www.scopus.com/inward/record.url?scp=85071726867&partnerID=8YFLogxK
U2 - 10.1016/j.jet.2019.08.006
DO - 10.1016/j.jet.2019.08.006
M3 - Article
AN - SCOPUS:85071726867
SN - 0022-0531
VL - 184
JO - Journal of Economic Theory
JF - Journal of Economic Theory
M1 - 104936
ER -