Title: Strategic Informed Trading and the Value of Private Information

Abstract: We consider a market of risky financial assets where the participants are an informed trader, a mass of uniformed traders and noisy liquidity providers. We prove the existence of a market-clearing equilibrium when the insider internalizes her power to impact prices. In the price-impact equilibrium the insider strategically reveals a noisier (compared to when the insider takes prices as given) signal, and prices are less reactive to the publicly available information. In contrast to the related literature, we show that in the price-impact equilibrium, the insider's ex-ante welfare monotonically increases in the signal precision. This clarifies when a trader with market power is motivated to both obtain and refine her private information. Furthermore, even though the uniformed traders act as price-takers, the effect of price impact is ex-ante welfare improving for them. By contrast, internalization of price impact may reduce insider ex-ante welfare. This happens provided the insider is sufficiently risk averse and the uninformed traders are sufficiently risk tolerant.