Information Acquisition in Financial Markets: a Correction∗

This note provides a proper example for the channel of strategic complementarities we proposed in our 2000 paper "Information Acquisition in Financial Markets". As pointed out in Chamley (2007), our earlier example contained an error, which, once corrected, reveals that our example actually exhibits strategic substitutability in information acquisition. JEL Codes: G14, D82, D84 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 an example 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 in fact a strategic substitute in our example. This leaves open the question of whether there is an example consistent with our original conjecture. This note provides a proper example of the mechanism we previously attempted to model.1 The example involves changing the way fundamentals and noise are jointly distributed, in contrast with our previous paper in which we tried to change the functional form for the distribution of each variable. While this amounts to a different technical assumption, allowing fundamentals and noise to be correlated captures precisely what we attempted to model in our earlier paper, a stochastic environment in which more agents learning can make prices harder, not easier, to read. ∗We are grateful to Christophe Chamley for discovering our error, and to Christian Hellwig for his comments. 1 Since our paper was published, there have been other papers that demonstrated information acquisition in financial markets can exhibit strategic complementarity, e.g. Veldkamp (2006), Chamley (2006), and Ganguli and Yang (2006). However, these papers rely on different mechanisms than the one we conjectured in our 2000 paper.