Informational Externalities and Welfare-Reducing Speculation

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Informational Externalities and Welfare-Reducing Speculation

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Title: Informational Externalities and Welfare-Reducing Speculation
Author: Stein, Jeremy C.
Citation: Stein, Jeremy C. 1987. Informational externalities and welfare-reducing speculation. Journal of Political Economy 95(6): 1123-1145.
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Abstract: Introducing more speculators into the market for a given commodity leads to improved risk sharing but can also change the informational content of prices. This inflicts an externality on those traders already in the market, whose ability to make inferences based on current prices will be affected. In some cases, the externality is negative: the entry of new speculators lowers the informativeness of the price to existing traders. The net result can be one of price destabilization and welfare reduction. This is true even when all agents are rational, risk-averse, competitors who make the best possible use of their available information.
Published Version: http://dx.doi.org/10.1086/261508
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3660740
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