A Theory of Blind Trading

Erwan Quintin () and Cyril Monnet

No 283, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: Differently sophisticated and informed investors coexist in most asset markets. At the same time, differently opaque trading avenues also coexist in most markets. We describe a simple environment where the second-best allocation calls precisely for this juxtaposition. Informed investors are useful because their presence provides the right incentives to generate the optimal volume and distribution of investment opportunities. The optimal opacity design serves to eliminate superfluous rents that would otherwise accrue to informed investors. The model makes precise predictions for the composition of different subsegment of a given asset markets and we argue that these predictions are consistent with the pertinent evidence.

Date: 2014
New Economics Papers: this item is included in nep-cta and nep-mst
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