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

2026-06-09

AI Summary

This study investigates the conditions under which informed traders voluntarily disclose their private information about asset values and how such disclosure affects the informational efficiency of market prices and the distribution of social surplus. Building on Kyle’s (1985) framework, the paper develops a model of strategic information transmission embedded within endogenous social network constraints, integrating Bayesian game theory, general equilibrium analysis, and theories of network formation. The work challenges the conventional wisdom that prices fully reveal private information under risk neutrality by introducing endogenous social networks into the information revelation game, thereby uncovering the interplay between network structure and information diffusion. It demonstrates that in equilibrium, informed agents disclose truthfully with positive probability, which reduces the informational content of prices and reshapes social surplus, while also characterizing the conditions under which efficient or inefficient network structures emerge.

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.

Problem

• information revelation
• social network
• informed trading
• equilibrium price
• social surplus

Innovation

• information revelation
• social networks
• market equilibrium
• endogenous connections
• Kyle model