This paper studies policy in a class of economies in which information about commonly-relevant fundamentals -- such as aggregate productivity and demand conditions -- is dispersed and can not be centralized by the government. In these economies, the decentralized use of information can fail to be efficient either because of discrepancies between private and social payoffs, or because of informational externalities. In the first case, inefficiency manifests itself in excessive non-fundamental volatility (overreaction to common noise) or excessive cross-sectional dispersion (overreaction to idiosyncratic noise). In the second case, inefficiency manifests itself in suboptimal social learning (low quality of information contained in macroeconomic data, financial prices, and other indicators of economic activity). In either case, a novel role for policy is identified: the government can improve welfare by manipulating the incentives agents face when deciding how to use their available sources of information. Our key result is that this can be achieved by appropriately designing the contingency of marginal taxes on aggregate activity. This contingency permits the government to control the reaction of equilibrium to different types of noise, to improve the quality of information in prices and macro data, and, in overall, to restore efficiency in the decentralized use of information.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13590.
Length: Date of creation: Nov 2007 Date of revision: Handle: RePEc:nbr:nberwo:13590
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Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D62 - Microeconomics - - Welfare Economics - - - Externalities D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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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.:
Camille Cornand & Frank Heinemann, 2006.
"Optimal Degree of Public Information Dissemination,"
Discussion Papers
158, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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Cited by: (explanations, 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.)
Joan Esteban & Facundo Albornoz & Paolo Vanin, 2009.
"Government Information Transparency,"
UFAE and IAE Working Papers
774.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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