roger w ferguson, jr : technology, information production, and market efficiency remarks by mr roger w ferguson, jr, vice chairman of the board of governors of the us federal reserve system, at a symposium sponsored by the federal reserve bank of kansas city, jackson hole, wyoming on 31 august 2001. * * * i am pleased to participate in this symposium on the information economy. my colleagues in kansas city deserve thanks for again having arranged a stimulating program. i will begin by discussing some issues that relate directly to the paper by d ’ avolio, gildor, and shleifer. i will then offer some broader comments on the actual or potential effects of information technology in markets for financial services. this paper fits into the large literature on the economics of imperfect information. this line of research has generated important insights concerning economic behavior and the functioning of markets, showing in particular that imperfect information can lead to outcomes that are distinctly less favorable than those under complete information. andrei shleifer ( with many co - authors ) has been a leading contributor to this field. the current paper argues that advances in information and communication technology have improved the functioning of financial markets in many ways but that this technology also has a dark side that may harm market efficiency. this concern centers on the stock market and reflects the following argument. improvements in information technology - most notably, the rapid growth of the internet have made participating in the market much easier and cheaper and, as a result, the market has drawn in many new and unsophisticated investors. these “ noise traders ” cannot differentiate between accurate and distorted information about a given company. thus, company managers see greater opportunity to boost their firm ’ s stock price by fooling investors through the release of distorted information - and have a strong incentive to do so because of the shift toward stock - based compensation and the widespread use of equity financing in the “ new economy ”. in the end, according to the paper, more information is available, but its quality has deteriorated, which reduces the benefit from information technology for market efficiency. because the incentive to produce distorted information is so strong, the authors doubt that market mechanisms alone can correct the problem. they advocate a two - pronged strategy of enhanced disclosure requirements and investor education to improve market efficiency. these recommendations are very sensible. the emphasis on disclosure has long been a cornerstone of the regulatory framework in the united states, and it lies behind recent initiatives at the sec to combat what the commission views as a variety of conflicts of interest that

projects seek to combine the benefits to users of the check with the processing efficiencies of electronic payment systems. one more set of very interesting experiments involves electronic bill presentment and bill payment. there are competing models of the way technology can be used to eliminate paper and save time in both the presentment and payment of consumer bills. leading models draw heavily on the ach as the electronic payment mechanism, creating a much more flexible interface for users with the ach than has existed in the past. as we look forward, the federal reserve recognizes that whatever innovations develop, the check will likely be with us for many years. americans still write about sixty eight billion checks a year, and the numbers are expected to grow. at the federal reserve, we continue to modernize our check - processing systems. we are testing new systems for truncating and electronically presenting checks, which include capturing and storing the image of checks and enabling institutions to make payment decisions in real time by accessing these images through the internet. at the same time, we are working to strengthen the payments system by enhancing the long - term efficiency of our check and automated clearinghouse services. the federal reserve also clearly recognizes the need to foster innovation in the private sector and to help remove barriers to the development and adoption of new payment services for electronic and traditional commerce. as i have often said, to continue to be effective, government ’ s regulatory role must increasingly be focused on assuring that adequate risk management systems are in place in the private sector. as financial systems have become more complex, detailed rules and standards have become both more burdensome and less effective. if we wish to foster financial innovation, we must first be careful not to impose rules that inhibit it, and we must be especially watchful that we not unduly impede our increasingly broad electronic payments system. thus, the private sector needs to play the pivotal role in determining what payment services consumers and businesses actually demand and in supplying those services. in a period of change and uncertainty there may be a temptation, and a desire by some market participants, to have the government step in and resolve the uncertainty, whether through standards, regulation, or other policies. in the case of electronic payment innovations, only consumers and merchants will ultimately determine what new products are successful in the marketplace. government action can retard progress, but almost certainly cannot ensure it. one important role government can play, however, is to help identify and, where appropriate, help remove barriers to innovation.