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Government intervention and information aggregation by prices

Author

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  • Itay Goldstein

    (University of Pennsylvania)

  • Philip Bond

    (University of Minnesota)

Abstract

Market prices are thought to contain a lot of useful information. Hence, government regulators (and other economic agents) are often urged to use market prices to guide decisions. An important issue to consider is the endogeneity of market prices and how they are affected by the prospect of government intervention. We show that if the government learns from the price when taking a corrective action, it might reduce the incentives of speculators to trade on their information, and hence reduce price informativeness. We show that transparency may reduce trading incentives and price informativeness further. Diametrically opposite implications hold for the alternative case in which the government's action amplifies the effect of underlying fundamentals. We derive implications for the optimal use of market information and for the government's incentives to produce its own information

Suggested Citation

  • Itay Goldstein & Philip Bond, 2012. "Government intervention and information aggregation by prices," 2012 Meeting Papers 225, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:225
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    File URL: https://economicdynamics.org/meetpapers/2012/paper_225.pdf
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    References listed on IDEAS

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    Cited by:

    1. Edmans, Alex & Heinle, Mirko & Huang, Chong, 2013. "The Real Costs of Disclosure," CEPR Discussion Papers 9637, C.E.P.R. Discussion Papers.
    2. Liyan Yang & Itay Goldstein, 2014. "Good Disclosure, Bad Disclosure," 2014 Meeting Papers 42, Society for Economic Dynamics.
    3. Goldstein, Itay & Leitner, Yaron, 2013. "Stress tests and information disclosure," Working Papers 13-26, Federal Reserve Bank of Philadelphia.

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