Are We Better-off for Working Hard?

When traders are uncertain on being informed and make effort to reduce their uncertainty, we would expect an improvement in both the welfare and price efficiency. By considering the disutility of the effort, we characterize the non-cooperative information game on traders' decision of making effort through a Nash equilibrium and asset price through a noisy rational expectation equilibrium. We show that making effort to be informed is harmful for social welfare. Also improving market efficiency is always at the cost of welfare reduction. Therefore, with the disutility of making effort to reduce the uncertainty on being informed, social welfare can be improved when traders make less effort, and more importantly, social welfare and price efficiency cannot be improved simultaneously.