Information Investment Regulation and Portfolio Delegation

Abstract

We consider policies to achieve the social optimal level of investment in information acquisition by examining arbitrageur investment strategy and the likelihood of a market freeze in equilibrium. We show that if direct portfolio management is dominant, an investment subsidy may be better, whereas if delegated portfolio management is dominant, an investment tax is needed to prevent overinvestment, although this raises the possibility of a market freeze. We use this to evaluate the effect of the recent trend in hedge funds switching their operations to family offices and shed light on recent regulatory discussion of Fin Tech and Big Tech firms.