Revealing information -- or not -- in a social network of traders

Abstract

We build upon a simple micro-founded model of asset trading proposed by Kyle (1985) to study under what conditions a trader who is privately informed of the future return of the asset may want to share her information with other traders. Despite what conventional wisdom suggests, we show that in the unique equilibrium of the game the informed trader reveals her information with positive probability. A consequence of it is that, in contrast with the corresponding no-communication benchmark, the equilibrium price need not be fully revealing of the asset's return, even if traders are risk neutral. This, in turn, has significant implications on the distribution of the social surplus. While our model initially assumes that inter-agent communication is restricted by an arbitrarily given social network, we also study which such networks arise when links are endogenously formed through traders' prior connection decisions.