Conformism and public news

Desgranges, Gabriel and Rochon, Céline (2013) Conformism and public news. Economic Theory, 52 (3). pp. 1061-1090.


We study a model where investment decisions are based on investor’s information about the unknown and endogenous return of the investment. The information of investors consists of endogenously determined messages sold by financial analysts who have access to both public and private information on the return. We assume that the return is increasing in the aggregate investment. This results into a beauty contest among analysts (or a “conformism” effect). There may exist multiple equilibria, each of which entails analysts sending the most informative messages possible. Beyond the “regular” equilibrium involving an overweighing of the public information, multiplicity introduces “inverted” equilibria where public information is negatively correlated with the return. The correlation across analysts’ information sources implies that not all the information available is transmitted to investors.

Item Type: Article
Keywords: Asymmetric information; Beauty contest; Conformism; Public information; finance
Subject(s): Finance
Date Deposited: 15 Apr 2013 11:34
Last Modified: 24 Feb 2017 15:21
Funders: N/A

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