Social Networks, Information Acquisition, and Asset Prices

We analyze a rational expectations equilibrium model to explore the implications of information networks for financial market outcomes. Holding fixed the amount of information in the economy, network communications improve market efficiency, reduce the cost of capital, increase liquidity and trading volume. However, in equilibrium, social communications reduce information acquisition and thus have a negative effect on market efficiency, liquidity, and asset prices. We examine when this negative effect dominates, and derive new testable empirical predictions concerning the relationship between network connectedness and financial market outcomes.