Optimal Disclosure Policy and Undue Diligence

Abstract:     
While both public and private financial agencies supply asset markets with large amounts of information, they do not generally 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 properties 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 to the extent that individuals can easily discover it for themselves.

Number of Pages in PDF File: 28

Keywords: Monetary Policy, Central Banking, Supply of Money and Credit

JEL Classification: E5

working papers series