IDEAS home Printed from https://ideas.repec.org/p/uts/rpaper/391.html
   My bibliography  Save this paper

Are We Better-off for Working Hard?

Author

Listed:

Abstract

When traders are uncertain on being informed and make effort to reduce their uncertainty, we would expect an improvement in both the welfare and price efficiency. By considering the disutility of the effort, we characterize the non-cooperative information game on traders' decision of making effort through a Nash equilibrium and asset price through a noisy rational expectation equilibrium. We show that making effort to be informed is harmful for social welfare. Also improving market efficiency is always at the cost of welfare reduction. Therefore, with the disutility of making effort to reduce the uncertainty on being informed, social welfare can be improved when traders make less effort, and more importantly, social welfare and price efficiency cannot be improved simultaneously.

Suggested Citation

  • Xue-Zhong He & Lei Shi & Marco Tolotti, 2018. "Are We Better-off for Working Hard?," Research Paper Series 391, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:391
    as

    Download full text from publisher

    File URL: https://www.uts.edu.au/sites/default/files/article/downloads/rp391.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mattsson, Lars-Goran & Weibull, Jorgen W., 2002. "Probabilistic choice and procedurally bounded rationality," Games and Economic Behavior, Elsevier, vol. 41(1), pages 61-78, October.
    2. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, vol. 53(3), pages 629-657, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Middel, Floor & López López, Mónica & Fluke, John & Witte, Susanne & Biehal, Nina & Grietens, Hans, 2024. "Who is involved in child protection investigations? The relationship between gender, ethnicity/migration background, and contacts between parents and caseworkers during investigations and assessments," Children and Youth Services Review, Elsevier, vol. 163(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Laura L. Veldkamp, 2006. "Information Markets and the Comovement of Asset Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 823-845.
    2. Mogens Fosgerau & André de Palma, 2016. "Generalized entropy models," Working Papers hal-01291347, HAL.
    3. Alexander D. Rothenberg & Francis E. Warnock, 2011. "Sudden Flight and True Sudden Stops," Review of International Economics, Wiley Blackwell, vol. 19(3), pages 509-524, August.
    4. Gehrig, Thomas & Jackson, Matthew, 1998. "Bid-ask spreads with indirect competition among specialists," Journal of Financial Markets, Elsevier, vol. 1(1), pages 89-119, April.
    5. Isaac Ehrlich & Jong Kook Shin & Yong Yin, 2011. "Private Information, Human Capital, and Optimal "Home Bias" in Financial Markets," Journal of Human Capital, University of Chicago Press, vol. 5(3), pages 255-301.
    6. Marcello Miccoli, 2012. "Optimal dynamic public communication," Temi di discussione (Economic working papers) 856, Bank of Italy, Economic Research and International Relations Area.
    7. Fosgerau, Mogens & de Palma, André, 2015. "Demand systems for market shares," MPRA Paper 62106, University Library of Munich, Germany.
    8. Isaac Ehrlich & Jong Kook Shin & Yong Yin, 2010. "Human Capital, Endogenous Information Acquisition,and Home Bias in Financial Markets," Working Papers 202010, Hong Kong Institute for Monetary Research.
    9. Tsakas, Elias & Voorneveld, Mark, 2009. "The target projection dynamic," Games and Economic Behavior, Elsevier, vol. 67(2), pages 708-719, November.
    10. Lindbeck, Assar & Weibull, Jörgen, 2020. "Delegation of investment decisions, and optimal remuneration of agents," European Economic Review, Elsevier, vol. 129(C).
    11. Liu, Jun & Peleg, Ehud & Subrahmanyam, Avanidhar, 2004. "The Value of Private Information," University of California at Los Angeles, Anderson Graduate School of Management qt71t9z3w3, Anderson Graduate School of Management, UCLA.
    12. Jean-Pierre DANTHINE & Francesco Giavazzi & Ernst-Ludwig von Thadden, 2000. "European Financial Markets After EMU: A First Assessment," FAME Research Paper Series rp13, International Center for Financial Asset Management and Engineering.
    13. Suren Basov & Svetlana Danilkina & David Prentice, 2020. "When Does Variety Increase with Quality?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(3), pages 463-487, May.
    14. Philippe Bacchetta & Eric Van Wincoop, 2008. "Higher Order Expectations in Asset Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 837-866, August.
    15. Jing Nie & Juliana Malagon & Julian Williams, 2022. "The impact of high speed quoting on execution risk dynamics: Evidence from interest rate futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(8), pages 1434-1465, August.
    16. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "International Equity Flows and Returns: A Quantitative Equilibrium Approach," International Finance 0405006, University Library of Munich, Germany.
    17. Li, Frank Weikai & Sun, Chengzhu, 2022. "Information acquisition and expected returns: Evidence from EDGAR search traffic," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    18. Georgy Chabakauri & Kathy Yuan & Konstantinos E Zachariadis, 2022. "Multi-asset Noisy Rational Expectations Equilibrium with Contingent Claims," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(5), pages 2445-2490.
    19. Calvet, Laurent E., 2001. "Incomplete Markets and Volatility," Journal of Economic Theory, Elsevier, vol. 98(2), pages 295-338, June.
    20. Cespa, Giovanni & Vives, Xavier, 2011. "Higher order expectations, illiquidity, and short-term trading," IESE Research Papers D/915, IESE Business School.

    More about this item

    Keywords

    Uncertainty and effort; Nash equilibrium; endogenous information; asset pricing; efficiency; and social welfare;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:391. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Duncan Ford (email available below). General contact details of provider: https://edirc.repec.org/data/qfutsau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.