Costly Acquisition of Information with Incomplete Markets

In this paper we introduce markets for information about assets' payoffs in a two-period General Equilibrium Incomplete Markets Model. We consider asymmetric Walrasian equilibria with endogenous information allocations and analyze the interaction between demand for information and equilibrium asset prices. We conclude that for economies with a high payoff uncertainty there only exist full information equilibria. In an application of the model, we use this result to show that it can be profitable for an intermediary to supply an investment fund of asssets and buy the informaton about assets' payoffs. The resulting equilibrium Pareto-improves the equilibrium without intermediation. Thus, if information and its costly acquisition are taken into account, the existence of redundant assets can be explained by the model.