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Informational Externalities, Strategic Delay, and the Search for Optimal Policy

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Listed author(s):
  • 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
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
Web page: http://www.econ.iastate.edu
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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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  1. Olivier Gossner & Nicolas Melissas, 2006. "Informational Cascades Elicit Private Information ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 297-325, 02.
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  7. Chamley, Christophe, 2004. "Delays and equilibria with large and small information in social learning," European Economic Review, Elsevier, vol. 48(3), pages 477-501, June.
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Cited by:

  1. Smith, L. & Sorensen, P., 1997. "Informational Herding and Optimal Experimentation," Economics Papers 139, Economics Group, Nuffield College, University of Oxford.
  2. Heidhues, Paul & Melissas, Nicolas, 2012. "Rational exuberance," European Economic Review, Elsevier, vol. 56(6), pages 1220-1240.

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