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Optimal disclosure policy and undue diligence

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Author Info

  • David Andolfatto
  • Aleksander Berentsen
  • Christopher Waller

Abstract

While both public and private financial agencies supply asset markets with large quantities of information, they do not necessarily 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 nature 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 in the event that individuals can easily discover it for themselves.

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Bibliographic Info

Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 045.

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Date of creation: Nov 2011
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Handle: RePEc:zur:econwp:045

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Keywords: Monetary policy; liquidity; financial markets;

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References

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  1. Prat, Andrea, 2003. "The Wrong Kind of Transparency," CEPR Discussion Papers 3859, C.E.P.R. Discussion Papers.
  2. David Andolfatto, 2010. "On the social cost of transparency in monetary economies," Working Papers 2010-001, Federal Reserve Bank of St. Louis.
  3. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 915-944, October.
  4. Gary Gorton, 2009. "The Subprime Panic," European Financial Management, European Financial Management Association, vol. 15(1), pages 10-46.
  5. 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.
  6. Makoto Watanabe & Leo Ferraris, 2007. "Collateral Secured Loans in a Monetary Economy," 2007 Meeting Papers 121, Society for Economic Dynamics.
  7. Ricardo Lagos & Guillaume Rocheteau, 2006. "Money and capital as competing media of exchange," Working Paper 0608, Federal Reserve Bank of Cleveland.
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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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