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Optimal disclosure policy and undue diligence

Author

Listed:
  • 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.

Suggested Citation

  • David Andolfatto & Aleksander Berentsen & Christopher Waller, 2011. "Optimal disclosure policy and undue diligence," ECON - Working Papers 045, Department of Economics - University of Zurich.
    • Handle: RePEc:zur:econwp:045
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    References listed on IDEAS

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    1. Andrea Prat, 2005. "The Wrong Kind of Transparency," American Economic Review, American Economic Association, vol. 95(3), pages 862-877, June.
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    7. Gary Gorton, 2009. "Information, Liquidity, and the (Ongoing) Panic of 2007," American Economic Review, American Economic Association, vol. 99(2), pages 567-572, May.
    8. Federal Reserve Bank of St. Louis & David Andolfatto, 2010. "On the Social Cost of Transparency in Monetary Economies," 2010 Meeting Papers 980, Society for Economic Dynamics.
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    Cited by:

    1. Gary Gorton & Guillermo Ordo?ez, 2014. "Collateral Crises," American Economic Review, American Economic Association, vol. 104(2), pages 343-378, February.
    2. repec:eee:finsta:v:37:y:2018:i:c:p:49-59 is not listed on IDEAS
    3. Galanis, Spyros, 2016. "The value of information in risk-sharing environments with unawareness," Discussion Paper Series In Economics And Econometrics 1602, Economics Division, School of Social Sciences, University of Southampton.
    4. Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2019. "On the Instability of Banking and Other Financial Intermediation," Working Papers 19.04, Swiss National Bank, Study Center Gerzensee.
    5. Galanis, Spyros, 2016. "The value of information in risk-sharing environments with unawareness," Games and Economic Behavior, Elsevier, vol. 97(C), pages 1-18.
    6. repec:eee:jetheo:v:177:y:2018:i:c:p:34-69 is not listed on IDEAS
    7. Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2019. "On the Instability of Banking and Financial Intermediation," Working Papers WP1901, Department of Economics, University of Missouri.
    8. repec:cup:macdyn:v:21:y:2017:i:06:p:1305-1335_00 is not listed on IDEAS
    9. Bignon, Vincent & Dutu, Richard, 2017. "Coin Assaying And Commodity Money," Macroeconomic Dynamics, Cambridge University Press, vol. 21(06), pages 1305-1335, September.
    10. Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2019. "On the Instability of Banking and Financial Intermediation," 2019 Meeting Papers 352, Society for Economic Dynamics.
    11. repec:eee:jbfina:v:97:y:2018:i:c:p:157-176 is not listed on IDEAS
    12. Wang, Zijian, 2019. "Trading Motives in Asset Markets," MPRA Paper 91401, University Library of Munich, Germany.
    13. Geromichalos, Athanasios & Herrenbrueck, Lucas M. & Salyer, Kevin D., 2016. "A search-theoretic model of the term premium," Theoretical Economics, Econometric Society, vol. 11(3), September.
    14. Chao Gu & Han Han & Randall Wright, 2016. "The Effects of Monetary Policy and Other Announcements," Working Papers 1621, Department of Economics, University of Missouri.
    15. repec:eee:jetheo:v:176:y:2018:i:c:p:619-649 is not listed on IDEAS
    16. Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2019. "On the Instability of Banking and other Financial Intermediation," Diskussionsschriften dp1902, Universitaet Bern, Departement Volkswirtschaft.
    17. Allen, Franklin & Vayanos, Dimitri & Vives, Xavier, 2014. "Introduction to financial economics," Journal of Economic Theory, Elsevier, vol. 149(C), pages 1-14.
    18. Monnet, Cyril & Quintin, Erwan, 2017. "Limited disclosure and hidden orders in asset markets," Journal of Financial Economics, Elsevier, vol. 123(3), pages 602-616.
    19. Erwan Quintin & Cyril Monnet, 2014. "A Theory of Blind Trading," 2014 Meeting Papers 283, Society for Economic Dynamics.
    20. Zijian Wang, 2019. "Trading Motives in Asset Markets," UWO Department of Economics Working Papers 20191, University of Western Ontario, Department of Economics.

    More about this item

    Keywords

    Monetary policy; liquidity; financial markets;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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