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.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
10046.
Length: Date of creation: 25 Sep 2002 Date of revision: Handle: RePEc:isu:genres:10046
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070 Phone: +1 515.294.6741 Fax: +1 515.294.0221 Email: Web page: http://www.econ.iastate.edu More information through EDIRC
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Find related papers by JEL classification: D8 - Microeconomics - - Information, Knowledge, and Uncertainty E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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