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Optimal disclosure policy and undue diligence

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Author Info

  • David Andolfatto
  • Aleksander Berentsen
  • Christopher J. Waller

Abstract

While both public and private financial agencies supply asset markets with large amounts of information, they do not generally disclose all asset-related information to the general public. This observation leads us to ask what principles might govern the optimal disclosure policy for an asset manager or financial regulator. To investigate this question, we study the properties of a dynamic economy endowed with a risky asset, and with individuals that lack commitment. Information relating to future asset returns is available to society at zero cost. Legislation dictates whether this information is to be made public or not. Given the properties of our environment, nondisclosure is generally desirable. This result is overturned, however, when individuals are able to access hidden information—what we call undue diligence—at sufficiently low cost. Information disclosure is desirable, in other words, only to the extent that individuals can easily discover it for themselves.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-001.

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Date of creation: 2012
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Handle: RePEc:fip:fedlwp:2012-001

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Keywords: Disclosure of information ; Banks and banking - Regulations;

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  1. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 915-944.
  2. David Andolfatto, 2010. "On the social cost of transparency in monetary economies," Working Papers 2010-001, Federal Reserve Bank of St. Louis.
  3. Alessandro Citanna & Antonio Villanacci, . "Incomplete markets, allocative efficiency and the information revealed by prices," GSIA Working Papers 10, Carnegie Mellon University, Tepper School of Business.
  4. Prat, Andrea, 2003. "The Wrong Kind of Transparency," CEPR Discussion Papers 3859, C.E.P.R. Discussion Papers.
  5. Ricardo Lagos & Guillaume Rocheteau, 2006. "Money and capital as competing media of exchange," Working Paper 0608, Federal Reserve Bank of Cleveland.
  6. Makoto Watanabe & Leo Ferraris, 2007. "Collateral Secured Loans in a Monetary Economy," 2007 Meeting Papers 121, Society for Economic Dynamics.
  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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