Who Acquires Information in Dealer Markets? Articles uri icon

publication date

  • April 2020

start page

  • 1145

end page

  • 1176

issue

  • 4

volume

  • 110

International Standard Serial Number (ISSN)

  • 0002-8282

Electronic International Standard Serial Number (EISSN)

  • 1944-7981

abstract

  • We study information acquisition in dealer markets. We first identify a one-sided strategic complementarity in information acquisition: the more informed traders are, the larger market makers' gain from becoming informed. When quotes are observable, this effect in turn induces a strategic complementarity in information acquisition amongst market makers. We then derive the equilibrium pattern of information acquisition and examine the implications of our analysis for market liquidity and price discovery. We show that increasing the cost of information can decrease market liquidity and improve price discovery.