Endogenous Information Acquisition with Cournot Competition

This paper studies information production in a model where both entry of analysts and their optimal information quality is endogenous. We show existence of the Bayesian–Nash equilibrium and solve for it in closed form. The model displays rich behavior. In particular, we find that the precision of an individual signal will always be bounded from above by the precision of the prior belief on payoff uncertainty. Furthermore, we give examples that contradict the naive intuition about information acquisition. For instance, we show how a change in the cost structure that makes information cheaper decreases price informativeness, while at the same time market liquidity and the amount of resources society spends on information acquisition can change either way. The model gives a simple, fully rational explanation on why the number of analysts following a stock can be quite large. Endogenizing the cost of information by allowing the manager to choose an optimal informational policy, we find a variety of optima that depend discontinuously on the model parameters. As a consequence, among two similar firms, one may find it optimal to attract many analysts, the other will cooperate with only a few.I am greatly indebted to Antonio Bernardo and Avanidhar Subrahmanyam, whose support, encouragement, insight, and many valuable comments made this paper possible. In addition, I also thank Justin Chan, Sudipto Dasgupta, Jason Hsu, Martin Nielsen, and Elena Sernova, the editor and an anonymous referee.