Information aggregation in financial markets with career concerns

What are the equilibrium features of a dynamic …nancial market in which traders care about their reputation for ability? We modify a standard sequential trading model to include traders with career concerns. We show that this market cannot be informationally e¢ cient: there is no equilibrium in which prices converge to the true value, even after an in…nite sequence of trades. We characterize the most revealing equilibrium of this game and show that an increase in the strength of the traders’reputational concerns has a negative e¤ect on the extent of information that can be revealed in equilibrium but a positive e¤ect on market liquidity. Keywords: Financial Equilibrium; Career Concerns; Information Cascades We are grateful to an Associate Editor and an anonymous referee for helpful comments. We thank Yacine Ait-Sahalia, Patrick Bolton, James Dow, Satoshi Kowanishi, Pete Kyle, Stephen Morris, Hyun Shin, Raj Singh, and Dimitri Vayanos for helpful discussions, and seminar participants at Bocconi, CeFiMS, CEPRGerzensee meetings, Heidelberg, Helsinki, IIES-Stockholm, LSE, Munich, NYU, Norwegian School of Economics, Nuremberg, Pompeu Fabra, Princeton, Toronto, Warwick Business School, WFA 2006 Meetings, and Yale for comments. Dasgupta thanks the EPSRC for …nancial support via grant GR/S83975/01. An earlier version of this paper was circulated under the title “Asset Price Dynamics When Traders Care About Reputation.”E-mail: [email protected], [email protected]