Fernando Vega-Redondo, University of Bocconi

Paper: Revealing information – or not – in a social network of traders

Abstract: We propose a simple micro-founded model of trading with ex-ante asymmetric informationsimilar to one proposed by Kyle (1985) in which the equilibrium price is fully revealing under rational expectations. We analyze under which conditions a privately informed trader may want to share her information with other traders for free. Despite the strictly competitive setup and conventional wisdom, we show that there is a unique separating equilibrium in which the informed trader reveals some signals and conceals others. A consequence of this is that the
price need not be fully revealing of the aggregate information in the market (even if traders are risk neutral), which in turn has welfare implications on the distribution of the social surplus at equilibrium. We establish these results for a context where the pattern of communication among traders is restricted by a given social network, studying as well what network arises when links are established endogenously.