Optimal disclosure policy and undue diligence

While both public and private financial agencies supply asset markets with large amounts of information, they do not generally disclose all assetrelated 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. ∗The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Andolfatto: Federal Reserve Bank of St.Louis, P.O. Box 442 St. Louis, MO 63166-0442 (email [email protected]). Berentsen: Economics Department, University of Basel, Peter-Merian-Weg 6, Postfach, CH-4002 Basel, Switzerland (email [email protected]). Waller: Federal Reserve Bank of St.Louis, P.O. Box 442 St. Louis, MO 63166-0442 (email [email protected]). For comments on earlier versions of this paper we thank Stephen Cecchetti, Leonardo Gambacorta, Jacob Gyntelberg, David Levine, Georg Noeldecke, Guillaume Rocheteau, Christian Upper, Randall Wright and participants in seminars or conferences at Banque de France, Bank for International Settlements, Federal Reserve Bank of St. Louis, Federal Reserve Bank of Chicago, Mannheim, St. Gallen, IHS Vienna, the Society for Economic Dynamics. Andolfatto acknowledges the financial support of SSHRC. Berentsen acknowledges support by the Bank for International Settlements (the usual disclaimer applies).