Information diversity and market efficiency spirals, Working paper, Wharton Upenn and Rotman Toronto

We analyze a model where the value of a traded security is affected by two different fundamentals and where traders are informed of different fundamentals. We examine the interaction between trading intensities on information about the two fundamentals and characterize when shocks to market efficiency get amplified or attenuated. Ampli-fication occurs because the aggressive trading on information about one fundamental reduces the uncertainty in trading on information about the other fundamental and encourages traders to trade more aggressively on such information. We show that this effect also generates strategic complementarities in information production