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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.

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File URL: http://www2.econ.iastate.edu/papers/p3813-2002-09-25.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers Archive with number 10046.

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Date of creation: 25 Sep 2002
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Handle: RePEc:isu:genres:10046
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Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

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Keywords: arrangement monotone; functional analysis; market structure; ordinal analysis; simplex; symmetry;

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Find related papers by 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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Cited by:

  1. Smith, L. & Sorensen, P., 1997. "Informational Herding and Optimal Experientation," Working papers 97-22, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Heidhues, Paul & Melissas, Nicolas, 2012. "Rational exuberance," European Economic Review, Elsevier, vol. 56(6), pages 1220-1240.

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