Optimal Disclosure Policy and Undue Diligence
Simon Fraser University (SFU) - Department of Economics
University of Basel - Economics Department; CESifo (Center for Economic Studies and Ifo Institute)
Christopher J. Waller
University of Notre Dame - Department of Economics
November 3, 2011
University of Zurich Economics Working Paper No. 45
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.
Number of Pages in PDF File: 28
Keywords: Monetary Policy, liquidity, financial markets
JEL Classification: E52, E58, E59working papers series
Date posted: November 24, 2011
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