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Government intervention and information aggregation by prices

  • Itay Goldstein

    (University of Pennsylvania)

  • Philip Bond

    (University of Minnesota)

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    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

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    File URL: https://economicdynamics.org/meetpapers/2012/paper_225.pdf
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    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 225.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:225
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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