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Information Diffusion

Paper Session

Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Seaport H
Hosted By: American Finance Association
  • Chair: Laura Veldkamp, Columbia University

Information, Participation, and Passive Investing

George Malikov
University of Michigan


I utilize a noisy rational expectations framework to investigate the impact of information acquisition and participation costs on the equilibrium level of passive investing and price informativeness. Passive share exhibits a hump-shaped relationship in stock-picking information costs and is increasing in the information cost of the aggregate asset. A greater cost to participate in stock-picking (i.e. investing in long-short portfolios) also leads to a higher passive share. Price informativeness is decreasing in both information and participation costs. The equilibrium level of passive investing is driven by the interplay between strategic substitutability in information acquisition and strategic substitutability in stock-picking participation.

Information Cascade and Threshold Implementation

Lin William Cong
University of Chicago
Yizhou Xiao
Chinese University of Hong Kong


Economic activities such as crowdfunding often involve sequential interactions, observational learning, and project implementation contingent on achieving certain thresholds of support. We incorporate endogenous all-or-nothing thresholds in a classic model of information cascade. We find that early supporters tap the wisdom of a later "gate-keeper" and effectively delegate their decisions, leading to uni-directional cascades and preventing agents' herding on rejections. Consequently, entrepreneurs or project proposers can charge supporters higher fees, and proposal feasibility, project selection, and information production all improve, even when agents have the option to wait. Novel to the literature, equilibrium outcomes depend on the crowd size, and in the limit, efficient project implementation and full information aggregation ensue.

Clients’ Connections: Measuring the Role of Private Information in Decentralised Markets

Peter Kondor
London School of Economics
Gabor Pinter
Bank of England


We propose a new measure of private information in decentralised markets – connections – defined as the number of dealers with whom a client trades in a time period. Using proprietary data for the UK government bond market, we show that clients have systematically better performance when having more connections, and this effect is stronger during macroeconomic announcements. Time-variation in market-wide connections also helps explain yield dynamics. Given our novel measure, we present two applications suggesting that (i) dealers pass on information, acquired from their informed clients, to their subsidiaries, and (ii) informed clients better predict the order-flow intermediated by their dealers.
Bradyn Breon-Drish
University of California-San Diego
Valentin Haddad
University of California-Los Angeles
Amir Kermani
University of California-Berkeley
JEL Classifications
  • G1 - General Financial Markets