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The social value of information uncertainty

Author

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  • He, Xue-Zhong (Tony)
  • Shi, Lei
  • Tolotti, Marco

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.

Suggested Citation

  • He, Xue-Zhong (Tony) & Shi, Lei & Tolotti, Marco, 2025. "The social value of information uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 229(C).
  • Handle: RePEc:eee:jeborg:v:229:y:2025:i:c:s0167268124004542
    DOI: 10.1016/j.jebo.2024.106840
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    References listed on IDEAS

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    More about this item

    Keywords

    Social welfare; Rational expectations equilibrium; Informed trading; Information acquisition uncertainty; Probabilistic choices;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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