The Social Value of Information Uncertainty

52 Pages Posted: 28 Feb 2019 Last revised: 29 Jul 2022

See all articles by Xuezhong He

Xuezhong He

Xi'an Jiaotong-Liverpool University (XJTLU)

Lei Shi

Macquarie University; Financial Research Network (FIRN)

Marco Tolotti

Ca Foscari University of Venice - Department of Management

Date Written: February 12, 2019


Information acquisition can favor social welfare despite that informed trading distorts risk-sharing and destroys trading opportunities. We analyze a Grossman-Stiglitz economy with homogeneous valuation and heterogeneous endowment shocks, where acquiring information is costly and uncertain. Investors optimally choose the probability to be informed by paying a monetary cost. The
probabilistic information choice generates an anticipatory welfare benefit that can lead to an overall welfare improvement when it offsets the cost of informed trading. Welfare improvement due to information acquisition can be substantial when risk-sharing incentives are weak, endowment shocks are small, and information precision is moderate, especially for speculators who provide liquidity. With heterogeneous endowment shocks, there can be a continuum of Pareto optimal information acquisition equilibria, while the no-information equilibrium is the unique Pareto-optimal equilibrium only when investors have strong risk-sharing incentives.

Keywords: social welfare, information acquisition uncertainty, probabilistic choices, rational expectations equilibrium

JEL Classification: D82, G12, G14

Suggested Citation

He, Xue-Zhong 'Tony' and Shi, Lei and Tolotti, Marco, The Social Value of Information Uncertainty (February 12, 2019). Available at SSRN: or

Xue-Zhong 'Tony' He (Contact Author)

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
Suzhou, JiangSu province 215123

Lei Shi

Macquarie University ( email )

New South Wales 2109
+612 98508478 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


Marco Tolotti

Ca Foscari University of Venice - Department of Management ( email )

San Giobbe, Cannaregio 873
Venice, 30121

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