Abstract: We consider a model of private information acquisition in which the cost of information depends on an asset's opacity. The model generates a hump-shaped relationship between opacity and the equilibrium amount of private information. In particular, the incentives to acquire information are largest for assets of intermediate opacity; such assets hence display low liquidity in the secondary market due to adverse selection. We also show that costly information acquisition generates incentives to source more correlated assets in the economy, as correlation reduces duplication of information costs. Our ndings have implications for the design of nancial regulation which aim at promoting transparency and reducing correlation in the fi nancial system.
|Publication status||Published - 2013|