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Optimal disclosure policy and undue diligence

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  • Andolfatto, David
  • Berentsen, Aleksander
  • Waller, Christopher

Abstract

Information about asset quality is often not disclosed to asset markets. What principles determine when a financial regulator should disclose or withhold information? We explore this question using a risk-sharing model with intertemporal trade and limited commitment. Information about future asset returns is available to society, but legislation dictates whether this information is disclosed or not. In our environment, nondisclosure is generally desirable except when individuals can access hidden information – what we call undue diligence – at sufficiently low cost. Ironically, information disclosure is desirable only when individuals have a strong incentive to discover it for themselves.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 149 (2014)
Issue (Month): C ()
Pages: 128-152

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Handle: RePEc:eee:jetheo:v:149:y:2014:i:c:p:128-152

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Disclosure policy; Undue diligence; Risk-sharing; Intertemporal trade; Limited commitment;

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  1. Lagos, Ricardo & Rocheteau, Guillaume, 2008. "Money and capital as competing media of exchange," Journal of Economic Theory, Elsevier, vol. 142(1), pages 247-258, September.
  2. Andrea Prat, 2002. "The wrong kind of transparency," LSE Research Online Documents on Economics 3679, London School of Economics and Political Science, LSE Library.
  3. Citanna, Alessandro & Villanacci, Antonio, 2000. "Incomplete Markets, Allocative Efficiency, and the Information Revealed by Prices," Journal of Economic Theory, Elsevier, vol. 90(2), pages 222-253, February.
  4. Federal Reserve Bank of St. Louis & David Andolfatto, 2010. "On the Social Cost of Transparency in Monetary Economies," 2010 Meeting Papers 980, Society for Economic Dynamics.
  5. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 915-944.
  6. Ferraris, Leo & Watanabe, Makoto, 2008. "Collateral secured loans in a monetary economy," Journal of Economic Theory, Elsevier, vol. 143(1), pages 405-424, November.
  7. Gary Gorton, 2009. "The Subprime Panic," European Financial Management, European Financial Management Association, vol. 15(1), pages 10-46.
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Cited by:
  1. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.

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