We examine the welfare effects of costly information acquistion in a version of the Grossman-Stiglitz (1980) exchange economy in which all traders are fully rational. We find, as emphasized by Hirschleifer, that information gathering leads the suboptimal risk sharing. Furthermore, information gathering worsens the equilibrium risk-return tradeoff faced by investors. We show that all investors would be better off if the information were not available and that the welfare costs of information gathering are greater when (i) the cost of acquiring information is lower; (ii) the prior return variance of the risky asset is higher; and (iii) the quality of the information is higher. We also show that the relative welfare costs to investors depends on the combination of their endowment and preferences.

This paper examines how private information affects trading volume, the information content of trading volume data, and if there are any relations between trading volume and price changes which can be explained by informational differences. We develop a model with two trading periods in which asymmetrically informed agents learn the trading volume of the first round of trading prior to trading in the second round. We also develop a general method for computing equilibria in such a model assuming only smooth, concave utility functions, and asset return distributions and signals with smooth densities. The model prices (i) a positive relation between trading volume and the absolute value of price changes; (ii) a positive relation between trading volume and subsequent stock price volatility; and (iii) that positive price moments on high trading volume lead, on average, to positive price movements.