Policy with dispersed information
By: [by] George-Marios Angeletos [and] Alessandro Pavan
Contributors: Pavan, Alessandro; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 07-28; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 07-28.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Number of pages: 50
Subjects: Economic policy; Econometric models
Description: This paper studies policy in a class of economies in which information about commonly-relevant fundamentals -- such as aggregate productivity and demand conditions -- is dispersed and can not be centralized by the government. In these economies, the decentralized use of information can fail to be efficient either because of discrepancies between private and social payoffs, or because of informational externalities. In the first case, inefficiency manifests itself in excessive non-fundamental volatility (overreaction to common noise) or excessive cross-sectional dispersion (overreaction to idiosyncratic noise). In the second case, inefficiency manifests itself in suboptimal social learning (low quality of information contained in macroeconomic data, financial prices, and other indicators of economic activity). In either case, a novel role for policy is identified: the government can improve welfare by manipulating the incentives agents face when deciding how to use their available sources of information. Our key result is that this can be achieved by appropriately designing the contingency of marginal taxes on aggregate activity. This contingency permits the government to control the reaction of equilibrium to different types of noise, to improve the quality of information in prices and macro data, and, in overall, to restore efficiency in the decentralized use of information. Keywords: Optimal policy, private information, complementarities, information externalities, social learning, efficiency. JEL Classifications: C72, D62, D82.
Notes: "October 30, 2007"--title page. -- "October 26, 2007"--abstract page.

Includes bibliographical references (leaves 48-50).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.