How Information Structure Impacts Aggregation of Information in Markets

Felix Fattinger, Peter Bossaerts, Ryan Anderson

Elsevier BV | Published : 2020


We study information aggregation in financial markets. We introduce two new stability concepts: absolute stability (sensitivity of rational expectations equilibrium prices to signals (bits) that are lost or garbled), and relative stability (the difference between prices in the rational expectations and the corresponding private-information equilibria). The concepts are applied to two canonical settings of information aggregation, namely: (i) winner-take-all contracts, where a binary payment depends on the signals held by the majority of the agents; (ii) assets whose payoffs depend on the average of the signals across the agents. The former is unstable under both concepts, and hence, would le..

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