The Social Value of Policy Signals
37 Pages Posted: 2 Oct 2012
Date Written: September 1, 2012
Do public policy signals improve the alignment of market outcomes with economic fundamentals? Existing work contends that, when individual players have an incentive to coordinate their actions, public policy signals could steer these actions away from the fundamentals. We argue that such a conclusion rests on a restricted information structure, predicated on markets being segmented. Public policy signals are unambiguously beneficial in an integrated market, where they refine other public information that prices generate endogenously. An implication of this finding is that policy authorities have an important role to play in collecting and disseminating data on aggregate market positions.
Keywords: optimal disclosure, endogenous public signal, strategic complementarity, private information
JEL Classification: D62, D82, E58
Suggested Citation: Suggested Citation