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American Economic Journal: Microeconomics: Vol. 2 No. 4 (November 2010)

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Security Price Informativeness with Delegated Traders

Article Citation

Gorton, Gary, Ping He, and Lixin Huang. 2010. "Security Price Informativeness with Delegated Traders." American Economic Journal: Microeconomics, 2(4): 137-70.

DOI: 10.1257/mic.2.4.137

Abstract

Trade in securities markets is conducted by agents acting for principals, using "mark-to-market" contracts whereby performance is assessed using security market prices. We endogenize contract choices, information production, informed trading, and security price informativeness. But there is a contract externality. Prices are informative only because other principals induce their agents to trade based on privately produced information. The agent-traders then have an incentive to coordinate and shirk. The market price is less informative, reducing the effectiveness of mark-to-market contracts. By using managerial discretion to vary the contract type unpredictably, principals mitigate traders' coordinated manipulation and improve price informativeness. (JEL D82, D86, G12)

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Authors

Gorton, Gary (Yale U)
He, Ping (Tsinghua U)
Huang, Lixin (GA State U)

JEL Classifications

D82: Asymmetric and Private Information
D86: Economics of Contract: Theory
G12: Asset Pricing; Trading volume; Bond Interest Rates

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