Harald Uhlig

Thesis: Costly Information Acquisition, Stock Prices and Neoclassical Growth



An old question in economics concerns the role of the stock market: Is the stock market another Las Vegas, where a lot of people just “gamble”? Or do the activities of informed stock traders contribute in a useful way to the optimal allocation of resources by providing guidance for physical
investment? A new model to adress this old question is analyzed in this thesis.

The approach taken here is to incorporate the endogeneously costly acquisition information about future returns the partial transmission of that information to the market via prices into an infinite horizon rational expectations neoclassical growth model. The key feature is that stock prices signal investment opportunities for physical investment and thus guide the allocation of resources. That is, the higher the stock price for a particular
technology, the more likely is a high future dividend stream per capital unit, and thus, the more should be added to the physical capital using that

However, this efficiency increasing effect is trading off against the redistributional effect, which arises because information acquirerers (insidersu) will earn a higher expected rate of return on their assets than the average. This tradeoff is analyzed for the model at hand with numerical calculations. It turns out that information acquirerers perform a welfare increasing role only as long as their information is revealed sufficiently well
to the market.

Among the theoretical insights, it is shown that a perfect market portfolio mutual fund rules out information acquisitional activities.


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