The social value of information uncertainty

Xue Zhong (Tony) He*, Lei Shi, Marco Tolotti

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

We analyze the welfare implication of information acquisition uncertainty in a Grossman–Stiglitz economy with endowment shocks. Investors make optimal probabilistic information acquisition choices subject to an increasing and convex monetary cost. This uncertainty gives rise to an anticipatory benefit so that informed trading can improve social welfare. Although informed trading distorts risk-sharing and destroys trading opportunities, the welfare improvement can be significant when investors have weak risk-sharing incentives, the endowment shocks are small and less informative about the aggregate endowment, and the risky payoff information is more noisy. Moreover, with heterogeneous endowments, there can be a continuum of Pareto optimal information-acquisition equilibria. Therefore, regulations aiming to level the playing field must be exercised with caution.

Original languageEnglish
Article number106840
JournalJournal of Economic Behavior and Organization
Volume229
DOIs
Publication statusPublished - Jan 2025

Keywords

  • Information acquisition uncertainty
  • Informed trading
  • Probabilistic choices
  • Rational expectations equilibrium
  • Social welfare

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