Security Price Informativeness with Delegated Traders

• DOI: 10.1257/mic.2.4.137
• Publication Date: 2010-10-29T13:13:40Z
• Authors: Gary Gorton; Ping He; Lixin Huang
• Keywords: Externality; Incomplete contracts

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