Information Dissemination by Insiders in Equilibrium
Posted: 30 Jun 2002
This paper generates an equilibrium explanation for partial disclosure of information by an insider to privileged associates. In our model, prices are set by competitive market makers in anticipation of trading volume, but are not affected by the actual number of trades realized. Liquidity demand is not perfectly inelastic, but rather liquidity traders are sensitive to trading costs through a reservation price. Because the profits from liquidity traders are bounded, the feasibility of an equilibrium depends on the balance between the number of associates, the precision of their information and the number of liquidity traders. Partially, rather than fully, disclosing information alters this balance by limiting the informational advantage of individual associates. If the number of associates is exogenous, this partial disclosure prevents market failure. If the insider chooses the number of associates, partial disclosure allows him to serve more associates and (potentially) increase total associate profits.
Keywords: Information sharing, limited liquidity, partial disclosure
JEL Classification: D4, D82
Suggested Citation: Suggested Citation