Costly Information Acquisition, Social Networks and Asset Prices: Experimental Evidence

Halim, Edward and Riyanto, Yohanes Eko and Roy, Nilanjan (2017): Costly Information Acquisition, Social Networks and Asset Prices: Experimental Evidence.

Abstract

We design an experiment to study the implications of information networks for the incentive to acquire costly information, market liquidity, investors' earnings and asset price characteristics in a financial market. Social communication crowds out information production as a result of agent's temptation to free ride on the signals purchased by their neighbors. Although information exchange among traders increases trading volume, improves liquidity and enhances the ability of asset prices to reflect the aggregate amount of information in the market, it fails to improve price accuracy. Net earnings are higher with information sharing due to reduced acquisition of costly signals.

• Item Type: MPRA Paper
• Language: English
• Keywords: Asymmetric Information, Costly Information Acquisition, Experimental Asset Markets, Social Network, Uncertainty
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

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