Collective Inference and the Demand for Financial Information∗

The tension between two margins of information acquisition is studied in a canonical two-period model of portfolio choice. At the intensive margin, an investor chooses the amount of information. At the extensive margin, investors subscribe to the information source. Only if the number of informed investors at the extensive margin is sufficiently small does acquisition of additional information at the intensive margin become rational in equilibrium. Uninformed investors’ collective inference of information from asset price diminishes the asset’s expected excess return so that investors value financial information in equilibrium only if sufficient exogenous noise in price burdens collective inference. Under constant relative risk aversion and joint Gaussian payoffs and signals, every signal inflicts a strict negative externality on an uninformed investor whose gain from collective inference does not outweigh the utility loss from diminished excess returns. Information acquisition is informationally inefficient in that informed investors acquire more signals than socially desirable. For information acquisition to occur in equilibrium, information access is priced with a two-part tariff that extracts from informed investors their utility gain over uninformed investors.