Rational expectations equilibrium with uncertain proportion of informed traders

This paper introduces uncertainty regarding the proportion of informed traders in a rational expectation equilibrium model with asymmetric information. The proportion uncertainty dramatically changes the properties of the resulting equilibrium. First, it may generate multiple nonlinear rational expectations equilibria, which can help explain the excessive volatility of stock prices. Second, the expected price informativeness is a non-monotonic function of the proportion of informed traders, which suggests that the traders will have more incentive to become informed as the proportion of informed traders gets larger.