TY - JOUR
T1 - The social value of information uncertainty
AU - He, Xue Zhong (Tony)
AU - Shi, Lei
AU - Tolotti, Marco
N1 - Publisher Copyright:
© 2024 Elsevier B.V.
PY - 2025/1
Y1 - 2025/1
N2 - 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.
AB - 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.
KW - Information acquisition uncertainty
KW - Informed trading
KW - Probabilistic choices
KW - Rational expectations equilibrium
KW - Social welfare
UR - http://www.scopus.com/inward/record.url?scp=85212157610&partnerID=8YFLogxK
U2 - 10.1016/j.jebo.2024.106840
DO - 10.1016/j.jebo.2024.106840
M3 - Article
AN - SCOPUS:85212157610
SN - 0167-2681
VL - 229
JO - Journal of Economic Behavior and Organization
JF - Journal of Economic Behavior and Organization
M1 - 106840
ER -