Information sharing in a perfectly competitive market

Abstract

We consider a large rational expectations economy where traders can share information with each other via an information network and investigate the impact of network connectedness on market equilibrium outcomes. We find that in the equilibrium with endogenous information, increasing network connectedness increases the total information in the market and trading volume, improves market efficiency, and enhances liquidity if and only if the market is sufficiently informationally efficient. Additionally, we provide a necessary and sufficient condition on the monotonicity of traders’ welfare over network connectedness. We also show that the implications in the baseline model also hold for some extensions.