Information Acquisition in Financial Markets: A Correction

In our 2000 paper “Information Acquisition in Financial Markets,” we argued that contrary to the conventional wisdom set forth in Grossman and Stiglitz (1980), it was theoretically  possible that as more traders in financial markets acquire information, equilibrium prices would change in such a way that it became more difficult for remaining agents to infer the fundamentals from prices. We presented a model we thought demonstrated this claim. However, as was subsequently pointed out to us by Christophe Chamley, the expression we used for the value of information in that paper (expression 3.5) was incorrect. As demonstrated by Chamley (2007), using the correct expression for the value of learning reveals that learning is a strategic substitute in that model. This leaves the question of whether the problem lies with our example or with the argument that when traders acquire information they can exacerbate the identification problem of remaining agents. In this note, we show that the argument we advanced is correct, although it requires that the fundamental value of the asset be correlated with noise trade. Since this feature was absent from

our original model, it was incapable of generating complementarities, as Chamley (2007) reports.