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Illiquidity and the Value of Private Information

We show two surprising consequences of introducing endogenous information acquisition into an imperfectly competitive trading model characterized by a small number of traders. First, the marginal value of private information can be negative, resulting in an equilibrium with no private-information acquisition. Second, imperfect competition typically generates information complementarity. We characterize the roles that liquidity traders play in these findings and demonstrate that several polices to improve price efficiency and market liquidity fall short in achieving the intended goals.