Download This PaperInformation Aggregation with Costly Information Acquisition
43 Pages Posted: 14 Sep 2023 Last revised: 23 May 2025
Date Written: April 14, 2025
Abstract
We study information aggregation in a dynamic trading model with partially informed traders. Ostrovsky [2012] showed that ‘separable’ securities aggregate information in all equilibria, however, separability is not robust to small changes in the traders’ private information. To remedy this problem, we allow traders to acquire signals with cost κ, in every period. We show that ‘κ separable securities’ characterize information aggregation and, as the cost decreases, almost all securities become κ separable, irrespective of the traders’ initial private information. Moreover, the switch to κ separability happens not gradually but discontinuously, hence even a small decrease in costs can result in a security aggregating information. We provide a complete classification of securities in terms of how well they aggregate information, which surprisingly depends only on their payoff structure.
Keywords: C91, D82, D83, D84, G14, G41 Information Aggregation, Information Acquisition, Financial Markets, Prediction Markets
JEL Classification: C91, D82, D83, D84, G14, G41
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