Suppose that in the Kyle (1985)s' model the informed investor is allowed to set a demand schedule conditioned on price rather than a market order. (a) Show that the equilibrium is essentially the same as when the informed investor must place a market order, in the sense that average noise trader transaction costs and informed investor profits are the same. The only difference is that liquidity is provided in part by the informed investor as well as by the competitive market makers. [Hint: imagine that the informed investor submits a demand, x , after observing the uninformed trader demand, z . So that if the competitive market makers set prices ????=????+????????, the informed trader, given a valuation ????, chooses a demand ???? to maximize his/her profit: maxx????(????−????)=????{????−[????+????(????+????)]}. ]

(b) What happens under this new assumption if there is more than one informed investor?

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a ANSWER The equilibrium is essentially the same as when the informed investor must place a market o... View the full answer