Advanced Search
MyIDEAS: Login to save this paper or follow this series

Listen to the Market, Hear the Best Policy Decision, but Don't Always Choose it

Contents:

Author Info

  • David Reinstein
  • Joon Song

    ()

Abstract

Real-world policymakers want to extract investors private information about a policy's likely effects by listening to "asset markets". However, this brings the risk that investors will profitably "manipulate" prices to steer policy. We model the interaction between a policymaker and an informed (profit-seeking) investor who can buy/short-sell an asset from uniformed traders. We characterize when the investor's incentives do not align with the policymaker's, implying that to induce truth-telling behaviour the policymaker must commit to sometimes ignoring the signal (as revealed by the investor's behaviour driving the asset's price). This implies a commitment to executing the policy with a probability depending on the asset's price. We develop a taxonomy for the full set relationships between private signals, asset values, and policymaker welfare, characterizing the optimal indirect mechanism for each case. We find that where the policymaker is ex-ante indifferent, she commits to sometimes/never executing after a bad signal, but always executes after a good signal. Generically, this "listeneing" mechanism leads to higher (policymaker) welfare then ignoring the signals. We discuss real-world evidence, implications for legislative processes, and phenomena such as "trial balloons" and "committing political capital".

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.essex.ac.uk/economics/discussion-papers/papers-text/dp748.pdf
Download Restriction: no

Bibliographic Info

Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 748.

as in new window
Length:
Date of creation: 01 Feb 2014
Date of revision:
Handle: RePEc:esx:essedp:748

Contact details of provider:
Postal: Wivenhoe Park, COLCHESTER. CO4 3SQ
Phone: +44-1206-872728
Fax: +44-1206-872724
Web page: http://www.essex.ac.uk/economics/
More information through EDIRC

Order Information:
Postal: Discussion Papers Administrator, Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, U.K.
Email:

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  2. Robin Hanson & Ryan Oprea, 2009. "A Manipulator Can Aid Prediction Market Accuracy," Economica, London School of Economics and Political Science, vol. 76(302), pages 304-314, 04.
  3. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-34, December.
  4. Holger Breinlich, 2011. "Heterogeneous Firm-Level Responses to Trade Liberalisation: A Test Using Stock Price Reactions," CEP Discussion Papers dp1085, Centre for Economic Performance, LSE.
  5. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  6. Kau, James B. & Linck, James S. & Rubin, Paul H., 2008. "Do managers listen to the market?," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 347-362, September.
  7. repec:reg:rpubli:460 is not listed on IDEAS
  8. repec:reg:wpaper:460 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:esx:essedp:748. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Essex Economics Web Manager).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.