Learning Before Trading: On the Inefficiency of Ignoring Free Information

78 Pages Posted: 25 Jan 2019 Last revised: 1 Jul 2021

See all articles by Doron Ravid

Doron Ravid

University of Chicago - Department of Economics

Anne-Katrin Roesler

University of Toronto - Department of Economics

Balazs Szentes

London School of Economics & Political Science (LSE) - Department of Economics

Date Written: November 6, 2020

Abstract

This paper analyzes a bilateral trade model where the buyer's valuation for the object is uncertain and she can privately purchase any signal about her valuation. The seller makes a take-it-or-leave-it offer to the buyer. The cost of a signal is smooth and increasing in informativeness. We characterize the set of equilibria when learning is free and show that they are strongly Pareto ranked. Our main result is that, when learning is costly but the cost of information goes to zero, equilibria converge to the worst free-learning equilibrium.

Keywords: flexible learning, bilateral trade, information acquisition

JEL Classification: C70, D42, D43, D47

Suggested Citation

Ravid, Doron and Roesler, Anne-Katrin and Szentes, Balazs, Learning Before Trading: On the Inefficiency of Ignoring Free Information (November 6, 2020). Available at SSRN: https://ssrn.com/abstract=3317917 or http://dx.doi.org/10.2139/ssrn.3317917

Doron Ravid (Contact Author)

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

Anne-Katrin Roesler

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

Balazs Szentes

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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