Informed trading and the 'leakage' of information

This paper, in a Shapley-Shubik market game framework, examines the effect of “leakage” of information: private information becoming available to uninformed traders at a later date. We show that (a) If information acquisition by the informed traders is costless, this leads to faster revelation of information; (b) If information acquisition is costly, there may be no acquisition of information; (c) Information leakage leads to a fall in value of information and hence, increases the incentive for informed traders to sell the information. KEYWORKDS: Informed trading, insider trading, strategic market games, information revelation, arrival of information, market efficiency. JEL Classification Numbers: D82, C72, G14, D51, D84. This paper was finished while I was visiting the CIE at ITAM, Mexico. I would like to thank ITAM for its hospitality. This paper has benefitted from comments of seminar participants at Erasmus, Swansea, and Essex, especially Abhinay Muthoo and Tridib Sharma. Contact: Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, U.K. Tel: (+44) 1206 872765, Fax: (+44) 1206 872724, Email: [email protected]