Information Production, Entry Barriers and Market Quality

We propose an information production model to explore the mechanism of the process from entry barriers to market quality. Entry barriers depicted by a level of information precision, affect the interactive behavior between information producers and rational investors, thereby acting on market quality. An “equilibrium precision” as the threshold of entry barriers plays a key role in terms of price informativeness. We provide a detailed description of the basic rationale and corresponding proofs. Specifically, in volatile financial markets, our model demonstrates the existence of an optimal entry barrier which leads to the highest market quality