The Social Value of Financial Expertise

Pablo Kurlat

Stanford University
October 2015

I study a model of trading under asymmetric information where traders can acquire
expertise to become better informed. Within the context of this model, I propose and
implement a method to estimate the ratio of the marginal social value to the marginal
private value of expertise. More expert traders get rents because they can choose which assets to trade and they add social value because by changing prices they induce surplus-creating margin l trades. The ratio between social and private value can be decomposed into three sufficient statistics: traders’ average profits, the fraction of bad assets among traded assets and the elasticity of the number of good assets traded with respect to capital inflows.For the venture capital industry, the ratio of social to private benefits is between 0.6 and 0.8. Since this is less than 1, it implies that at the margin expertise destroys surplus.

Keywords: Financial industry, expertise, asymmetric information, sufficient statistic

JEL codes: D53, D82, G14, G20