Spoiled for choice: Variety and efficiency in markets with incomplete information

Douglas Gale

doi:10.1006/reec.1996.0035

Spoiled for choice: Variety and efficiency in markets with incomplete information

Douglas Gale

Research output: Contribution to journal › Article › peer-review

Abstract

When the qualities of securities are uncertain, investors have an incentive to acquire information before they trade. Too much choice may lead to inefficiency, because it forces investors to engage in excessive search for the information they need. Similarly, if they rely on the information revealed by other investors, the existence of too much choice may again lead to inefficiency, because investors ignore the external effects of their search behaviour. In both cases, restricting the set of securities available may be Pareto- or welfare-improving. These ideas are applied to the regulation of financial markets.

Original language	English (US)
Pages (from-to)	41-67
Number of pages	27
Journal	Research in Economics
Volume	51
Issue number	1
DOIs	https://doi.org/10.1006/reec.1996.0035
State	Published - Apr 1997

Keywords

Efficiency
Financial markets
Information
Search

ASJC Scopus subject areas

Economics and Econometrics

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10.1006/reec.1996.0035

Cite this

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abstract = "When the qualities of securities are uncertain, investors have an incentive to acquire information before they trade. Too much choice may lead to inefficiency, because it forces investors to engage in excessive search for the information they need. Similarly, if they rely on the information revealed by other investors, the existence of too much choice may again lead to inefficiency, because investors ignore the external effects of their search behaviour. In both cases, restricting the set of securities available may be Pareto- or welfare-improving. These ideas are applied to the regulation of financial markets.",

keywords = "Efficiency, Financial markets, Information, Search",

author = "Douglas Gale",

note = "Funding Information: I would like to thank Piero Gottardi and the participants in the conference “Efficiency in Economies with Public Goods and Private Information” held at the University of Venice in January 1996 for helpful comments. The financial support of the National Science Foundation under Grant No. SBR-9422194 and of the C. V. Starr Center at New York University is gratefully acknowledged.",

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PY - 1997/4

Y1 - 1997/4

N2 - When the qualities of securities are uncertain, investors have an incentive to acquire information before they trade. Too much choice may lead to inefficiency, because it forces investors to engage in excessive search for the information they need. Similarly, if they rely on the information revealed by other investors, the existence of too much choice may again lead to inefficiency, because investors ignore the external effects of their search behaviour. In both cases, restricting the set of securities available may be Pareto- or welfare-improving. These ideas are applied to the regulation of financial markets.

AB - When the qualities of securities are uncertain, investors have an incentive to acquire information before they trade. Too much choice may lead to inefficiency, because it forces investors to engage in excessive search for the information they need. Similarly, if they rely on the information revealed by other investors, the existence of too much choice may again lead to inefficiency, because investors ignore the external effects of their search behaviour. In both cases, restricting the set of securities available may be Pareto- or welfare-improving. These ideas are applied to the regulation of financial markets.

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KW - Financial markets

KW - Information

KW - Search

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Spoiled for choice: Variety and efficiency in markets with incomplete information

Abstract

Keywords

ASJC Scopus subject areas

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