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Informational Externalities, Strategic Delay, and the Search for Optimal Policy

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  • Doyle, Matthew

Abstract

This paper examines optimal policy when agents, private investors and a government, can learn about the economy by observing others. Investors can delay investment in order to exploit future information. Importantly, investors ignore the informational value of their actions to others when deciding: this externality results in inefficiently high delay, motivating government intervention. The government searches for the optimal policy, while learning about the economy. Complications arise since investors are aware of any systematic component to policy and may respond perversely to government initiatives. The paper characterizes the optimal government policy and shows that the government achieves its desired outcome.

Suggested Citation

  • Doyle, Matthew, 2002. "Informational Externalities, Strategic Delay, and the Search for Optimal Policy," Staff General Research Papers Archive 10046, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:10046
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    File URL: http://www2.econ.iastate.edu/papers/p3813-2002-09-25.pdf
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    Cited by:

    1. Smith, L. & Sorensen, P., 1997. "Informational Herding and Optimal Experimentation," Economics Papers 139, Economics Group, Nuffield College, University of Oxford.
    2. Heidhues, Paul & Melissas, Nicolas, 2012. "Rational exuberance," European Economic Review, Elsevier, vol. 56(6), pages 1220-1240.

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    More about this item

    Keywords

    arrangement monotone; functional analysis; market structure; ordinal analysis; simplex; symmetry;
    All these keywords.

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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