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Dr Jekyll and Mr Hyde: Feedback and welfare when hedgers can acquire information

Author

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  • Olivier, Jacques

    (HEC Paris)

Abstract

I analyze welfare in a model where information acquisition is endogenous, information has real effects, and agents are rational. Hedgers derive a private benefit from holding the asset. Information improves welfare if real efficiency gains exceed cost of acquiring information and foregone gains from trade. I show three new results. Hedgers and speculators have different incentives to acquire information. Gains from trade are lower when hedgers acquire information than when speculators do. Agents may produce less information than would be socially optimal, in which case a contract whereby a firm pays a designated market-maker to lower her spread increases welfare.

Suggested Citation

  • Olivier, Jacques, 2023. "Dr Jekyll and Mr Hyde: Feedback and welfare when hedgers can acquire information," HEC Research Papers Series 1469, HEC Paris.
    • Handle: RePEc:ebg:heccah:1469
    DOI: 10.2139/ssrn.4342867
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    More about this item

    Keywords

    Welfare; information; hedgers; speculators; feedback; regulation; designated market-makers;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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