The Action Value of Information and the Natural Transparency Limit∗

Add an opening stage of signal acquisition to a canonical portfolio choice model and let investors have rational expectations about the ensuing Walrasian equilibrium. The expected marginal utility of a signal (its action value) falls in the number of signals and turns strictly negative at a finite number because signals diminish the asset’s excess return. There is a natural transparency limit at which rational investors pay to inhibit information disclosure. Prior to the limit, financial information is a public good and justifies intervention. To instill more transparency, cutting costs of information acquisition is superior to disclosure because disclosure crowds out private information acquisition and risks a violation of the transparency limit.