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Policy with Dispersed Information

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Author Info

  • Alessandro Pavan

    (Northwestern University)

  • George-Marios Angeletos

    (MIT)

Abstract

This paper studies optimal taxation in a class of economies in which agents have dispersed private information regarding aggregate shocks (commonly-relevant fundamentals such as aggregate productivity and demand conditions). The dispersion of information opens the door to inefficiencies that need not have obtained otherwise and that may manifest themselves in excessive non-fundamental volatility (overreaction to common noise), excessive cross-sectional dispersion (overreaction to idiosyncratic noise), or suboptimal social learning (low quality of information contained in financial prices, macroeconomic data, and other indicators of economic activity). In either case, a novel role for policy emerges. We thus seek to identify policies that permit the government to manipulate how agents utilize their various sources of information, without requiring the government to monitor these 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 is not essential when agents have private information regarding only idiosyncratic shocks, but becomes essential once agents have private information regarding aggregate shocks. It permits the government to control the reaction of the economy to noise, as well as to improve the quality of information in prices and macro data.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 1103.

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Date of creation: 2008
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Handle: RePEc:red:sed008:1103

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References

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  1. Geore-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," Levine's Bibliography 122247000000000289, UCLA Department of Economics.
  2. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
  3. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, vol. 71(1), pages 260-288, October.
  4. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  6. Bartosz Maćkowiak & Mirko Wiederholt, 2009. "Optimal sticky prices under rational inattention," Working Paper Series 1009, European Central Bank.
  7. Cornand, Camille & Heinemann, Frank, 2006. "Optimal Degree of Public Information Dissemination," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 158, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  8. Vives, Xavier, 1993. "How Fast Do Rational Agents Learn?," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 329-47, April.
  9. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  10. George-Marios Angeletos & Alessandro Pavan, 2007. "Socially Optimal Coordination: Characterization and Policy Implications," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 585-593, 04-05.
  11. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  12. Narayana R Kocherlakota, 2005. "Advances in Dynamic Optimal Taxation," Levine's Bibliography 784828000000000518, UCLA Department of Economics.
  13. Mauro Roca, 2010. "Transparency and Monetary Policy with Imperfect Common Knowledge," IMF Working Papers 10/91, International Monetary Fund.
  14. Michael Woodford, 2005. "Central Bank Communication and Policy Effectiveness," NBER Working Papers 11898, National Bureau of Economic Research, Inc.
  15. Camille Cornand & Romain Baeriswyl, 2006. "Monetary Policy and its Informative Value," FMG Discussion Papers dp569, Financial Markets Group.
  16. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  17. Vives, Xavier, 1988. "Aggregation of Information in Large Cournot Markets," Econometrica, Econometric Society, vol. 56(4), pages 851-76, July.
  18. Guido Lorenzoni, 2007. "News Shocks and Optimal Monetary Policy," NBER Working Papers 12898, National Bureau of Economic Research, Inc.
  19. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
  20. Stephen Morris & Hyun Song Shin, 2005. "Central Bank Transparency and the Signal Value of Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 1-66.
  21. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, vol. 75(4), pages 1103-1142, 07.
  22. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-84, December.
  23. Amador, Manuel & Weill, Pierre-Olivier, 2006. "Learning from Private and Public Observation of Other's Actions," MPRA Paper 109, University Library of Munich, Germany.
  24. Philippe Bacchetta & Eric van Wincoop, 2005. "Can Information Heterogeneity Explain the Exchange Rate Determination?," FAME Research Paper Series rp155, International Center for Financial Asset Management and Engineering.
  25. Vives, Xavier, 1997. "Learning from Others: A Welfare Analysis," Games and Economic Behavior, Elsevier, vol. 20(2), pages 177-200, August.
  26. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2007. "Wall Street and Silicon Valley: A Delicate Interaction," NBER Working Papers 13475, National Bureau of Economic Research, Inc.
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