Dr Jekyll and Mr Hyde
Résumé
I analyze welfare in a model where information acquisition is endogenous, information has real effects, and agents are rational. Hedgers derive a private benefit from holding the asset. Information improves welfare if real efficiency gains exceed cost of acquiring information and foregone gains from trade. I show three new results. Hedgers and speculators have different incentives to acquire information. Gains from trade are lower when hedgers acquire information than when speculators do. Agents may produce less information than would be socially optimal, in which case a contract whereby a firm pays a designated market-maker to lower her spread increases welfare.