nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2012‒02‒01
27 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. An Equilibrium Asset Pricing Model with Labor Market Search By Kuehn, Lars-Alexander; Petrosky-Nadeau, Nicolas; Zhang, Lu
  2. Applications and Interviews. A Structural Analysis of Two-Sided Simultaneous Search By Ronald P. Wolthoff
  3. The effect of endogenous human capital accumulation on optimal taxation By William B. Peterman
  4. Common and idiosyncratic disturbances in developed small open economies By Pablo A. Guerron-Quintana
  5. Foreign Output Shocks and Monetary Policy Regimes in Small Open Economies: A DSGE Evaluation of East Asia By Joseph D. ALBA; Wai-Mun CHIA; Donghyun PARK
  6. Exogenous vs. endogenous separation By Shigeru Fujita; Garey Ramey
  7. Risk aversion heterogeneity and the investment-uncertainty relationship By Gianluca Femminis
  8. Growth and Demographic Change: Do Environmental Factors Matter? By Dimitrios Varvarigos; Intan Zanariah Zakaria
  9. Fat-Tail Distributions and Business-Cycle Models By Guido Ascari; Giorgio Fagiolo; Andrea Roventini
  10. Economics and Climate Change: Integrated Assessment in a Multi-Region World By John Hassler; Per Krusell
  11. Liquidity when it matters: QE and Tobin’s q By Driffill, John; Miller, Marcus
  12. Selective Hiring and Welfare Analysis in Labor Market Models By Christian Merkl, Thijs van Rens
  13. Quantity rationing of credit By Waters , George A.
  14. Monetary policy and unemployment in open economies By Engler, Philipp
  15. The Environment and Directed Technical Change: Comment By Jean-Charles Hourcade; Antonin Pottier; Etienne Espagne
  16. The aggregate implications of individual labor supply heterogeneity By José Mustre-del-Río
  17. Basel Accord and financial intermediation: the impact of policy By Martin Berka; Christian Zimmermann
  18. Time Preference and the Distribution of Wealth and Income By Richard M. H. Suen
  19. Optimal monetary policy in a two country model with firm-level heterogeneity By Dudley Cooke
  20. Learning generates Long Memory By Guillaume Chevillon; Sophocles Mavroeidis
  21. Capital Accumulation And Present-biased Preference By Wang Peng; Heng-fu Zou
  22. Optimal control and the Fibonacci sequence By Thomas von Brasch, Johan Byström and Lars PetterLystad
  23. How Should Financial Intermediation Services be Taxed? By Lockwood, Ben
  24. Some unpleasant general equilibrium implications of executive incentive compensation contracts By John B. Donaldson; Natalia Gershun; Marc P. Giannoni
  25. International Macroeconomic Policy: When Wealth Affects People's Impatience By Wang Peng; Heng-fu Zou
  26. Learning Within Rational-Expectations Equilibrium By Thomas W.L. Norman
  27. Optimal disclosure policy and undue diligence By David Andolfatto; Aleksander Berentsen; Christopher J. Waller

  1. By: Kuehn, Lars-Alexander (Carnegie Mellon University); Petrosky-Nadeau, Nicolas (Carnegie Mellon University); Zhang, Lu (OH State University)
    Abstract: Search frictions in the labor market help explain the equity premium in the financial market. We embed the Diamond-Mortensen-Pissarides search framework into a dynamic stochastic general equilibrium model with recursive preferences. The model produces a sizeable equity premium of 4.54% per annum with a low interest rate volatility of 1.34%. The equity premium is strongly countercyclical, and forecastable with labor market tightness, a pattern we confirm in the data. Intriguingly, search frictions, combined with a small labor surplus and large job destruction flows, give rise endogenously to rare disaster risks a la Rietz (1988) and Barro (2006).
    JEL: E21 E24 E40 G12
    Date: 2011–12
  2. By: Ronald P. Wolthoff (University of Toronto)
    Abstract: Much of the job search literature assumes bilateral meetings between workers and firms. This ignores the frictions that arise when meetings are actually multilateral. I analyze the magnitude of these frictions by presenting an equilibrium job search model with an endogenous number of contacts. Workers contact firms by applying to vacancies, whereas firms contact applicants by interviewing them. Sending applications and interviewing applicants are costly activities but increase the probability to match. In equilibrium, contract dispersion arises and workers spread their applications over the different contract types. Estimation of the model on the Employment Opportunities Pilot Projects data set provides values for the cost of an application, the cost of an interview, and the value of non-market time. Frictions on the worker and the firm side are estimated to each cause approximately half of the 4.7% output loss compared to a Walrasian world. I show that in the estimated equilibrium welfare is improved if unemployed workers increase their search intensity.
    Keywords: Directed Search, Recruitment, Stable Matching, Labor Market Frictions, Structural Estimation, Efficiency, Policy Analysis
    JEL: J64 J31 D83
    Date: 2011–12
  3. By: William B. Peterman
    Abstract: This paper considers the impact of endogenous human capital accumulation on optimal tax policy in a life cycle model. Including endogenous human capital accumulation, either through learning-by-doing or learning-or-doing, is analytically shown to create a motive for the government to use age-dependent labor income taxes. If the government cannot condition taxes on age, then it is optimal to use a tax on capital in order to mimic such taxes. Quantitatively, introducing learning-by-doing or learning-or-doing increases the optimal tax on capital by forty or four percent, respectively. Overall, the optimal tax on capital is thirty five percent higher in the model with learning-by-doing compared to the model with learning-or-doing implying that how human capital accumulates is of significant importance when determining the optimal tax policy.
    Keywords: Capital ; Human capital ; Taxation
    Date: 2012
  4. By: Pablo A. Guerron-Quintana
    Abstract: Using an estimated dynamic stochastic general equilibrium model, I show that shocks to a common international stochastic trend explain on average about 10% of the variability of output in several small developed economies. These shocks explain roughly twice as much of the volatility of consumption growth as the volatility of output growth. Country-speci c disturbances account for the bulk of the volatility in the data. Substantial heterogeneity in the estimated parameters and stochastic processes translates into a rich array of impulse responses across countries.
    Date: 2012
  5. By: Joseph D. ALBA (Joseph D. ALBA Nanyang Technological University, Singapore); Wai-Mun CHIA (Wai-Mun CHIA Nanyang Technological University, Singapore); Donghyun PARK (Donghyun PARK Asian Development Bank (ADB), The Philippines)
    Abstract: East Asia’s small open economies were hit in varying degrees by the sharp drop in the output of major industrial countries during the global financial and economic crisis of 2008-2009. This highlights the role of monetary policy regimes in cushioning small open economies from adverse external output shocks. To assess the welfare impact of external shocks on key macroeconomic variables under different monetary policy regimes, we numerically solve and calculate the welfare loss function of a dynamic stochastic general equilibrium (DSGE) model. We find that CPI inflation targeting minimizes welfare losses for import-to-GDP ratios from 0.3 to 0.9. However, welfare under the pegged exchange rate regime is almost equivalent to CPI inflation targeting when the import-to-GDP ratio is one while the Taylor-type rule minimizes welfare when the import-to-GDP ratio is 0.1. We calibrate the model and derive welfare implications for eight East Asian small open economies.
    Date: 2011–12–01
  6. By: Shigeru Fujita; Garey Ramey
    Abstract: This paper assesses how various approaches to modeling the separation margin affect the ability of the Mortensen-Pissarides job matching model to explain key facts about the aggregate labor market. Allowing for realistic time variation in the separation rate, whether exogenous or endogenous, greatly increases the unemployment variability generated by the model. Specifications with exogenous separation rates, whether constant or time-varying, fail to produce realistic volatility and productivity responsiveness of the separation rate and worker flows. Specifications with endogenous separation rates, on the other hand, succeed along these dimensions. In addition, the endogenous separation model with on-the-job search yields a realistic Beveridge curve correlation and performs well in accounting for the productivity responsiveness of market tightness. While adopting the Hagedorn-Manovskii calibration approach improves the behavior of the job finding rate, the volume of job-to-job transitions in the on-the-job search specification becomes essentially zero.
    Date: 2011
  7. By: Gianluca Femminis (DISCE,Università Cattolica)
    Abstract: A simple dynamic general equilibrium model of savings and investment is populated by agents with Kreps-Porteus preferences. Households are heterogeneous in their risk aversion, which explains the negative relationship between aggregate investment and aggregate uncertainty. Agents trade a riskless assets to share the aggregate risk, so that in equilibrium a higher uncertainty induces the low risk-averse individuals to increase their position in the risky asset, and the highly risk averse agents to increase their share of safe bonds. This portfolio effect increases the certainty-equivalent future returns; in response to this rise, savings and investment decrease due to a limited willingness to substitute consumption over time.
    Keywords: Aggregate investment; uncertainty; risk aversion; heterogeneity.
    JEL: D92 E22
    Date: 2012–01
  8. By: Dimitrios Varvarigos; Intan Zanariah Zakaria
    Abstract: We incorporate health-damaging pollution into a three period overlapping generations model in which life expectancy, fertility and economic growth are all endogenous. We show that environmental factors can cause significant changes to the economy’s demographics. In particular, the entrepreneurial choice of less polluting production processes, induced by environmental policy, can account for such demographic changes as higher longevity and lower fertility rates.
    Keywords: Economic growth; Pollution; Demography
    JEL: J10 O41 Q56
    Date: 2011–09
  9. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Giorgio Fagiolo (Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa); Andrea Roventini (University Paris Ouest Nanterre La Defense, Department of Economic Sciences (University of Verona) and Laboratory of Economics and Management (LEM) (Sant'Anna School of Advanced Studies, Pisa))
    Abstract: Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this sta- tistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.
    Keywords: Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential- Power Distributions, Laplace Distributions, DSGE Models, RBC Models.
    JEL: C1 E3
    Date: 2012–01
  10. By: John Hassler; Per Krusell
    Abstract: This paper develops a model that integrates the climate and the global economy---an integrated assessment model---with which different policy scenarios can be analyzed and compared. The model is a dynamic stochastic general-equilibrium setup with a continuum of regions. Thus, it is a full stochastic general-equilibrium version of RICE, Nordhaus's pioneering multi-region integrated assessment model. Like RICE, our model features traded fossil fuel but otherwise has no markets across regions---there is no insurance nor any intertemporal trade across them. The extreme form of market incompleteness is not fully realistic but arguably not a decent approximation of reality. Its major advantage is that, along with a set of reasonable assumptions on preferences, technology, and nature, it allows a closed-form model solution. We use the model to assess the welfare consequences of carbon taxes that differ across as well as within oil-consuming and -producing regions. We show that, surprisingly, only taxes on oil producers can improve the climate: taxes on oil consumers have no effect at all. The calibrated model suggests large differences in views on climate policy across regions.
    JEL: H23 O44 Q0
    Date: 2012–01
  11. By: Driffill, John (Birkbeck, University of London); Miller, Marcus (University of Warwick)
    Abstract: When financial markets freeze in fear, borrowing costs for solvent governments may fall towards zero in a flight to quality – but credit-worthy private borrowers can be starved of external funding. In Kiyotaki and Moore (2008), where liquidity crisis is captured by the effective rationing of private credit, tightening credit constraints have direct effects on investment. If prices are sticky, the effects on aggregate demand can be pronounced – as reported by FRBNY for the US economy using a calibrated DSGE-style framework modified to include such frictions. In such an environment, two factors stand out. First the recycling of credit flows by central banks can dramatically ease credit-rationing faced by private investors: this is the rationale for Quantitative Easing. Second, revenue-neutral fiscal transfers aimed at would-be investors can have similar effects. We show these features in a stripped- down macro model of inter-temporal optimisation subject to credit constraints.
    Keywords: Credit Constraints; Temporary Equilibrium; Liquidity Shocks
    Date: 2011
  12. By: Christian Merkl, Thijs van Rens
    Abstract: Firms select not only how many, but also which workers to hire. Yet, in standard search models of the labor market, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a search model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective
    Keywords: labor market models, welfare, optimal unemployment insurance
    JEL: E24 J65
    Date: 2012–01
  13. By: Waters , George A. (Bank of Finland Research and Illinois State University)
    Abstract: Quantity rationing of credit, when firms are denied loans, has greater potential to explain macroeconomic fluctuations than borrowing costs. This paper develops a DSGE model with both types of financial frictions. A deterioration in credit market confidence leads to a temporary change in the interest rate, but a persistent change in the fraction of firms receiving financing, which leads to a persistent fall in real activity. Empirical evidence confirms that credit market confidence, measured by the survey of loan officers, is a significant leading indicator for capacity utilization and output, while borrowing costs, measured by interest rate spreads, is not.
    Keywords: quantity rationing; credit; VAR
    JEL: E10 E24 E44 E50
    Date: 2012–01–17
  14. By: Engler, Philipp
    Abstract: After an expansionary monetary policy shock employment increases and unemployment falls. In standard New Keynesian models the fall in aggregate unemployment does not affect employed workers at all. However, Lüchinger, Meier and Stutzer (2010) found that the risk of unemployment negatively affects utility of employed workers: An increases in aggregate unemployment decreases workers' subjective well-being, which can be explained by an increased risk of becoming unemployed. I take account of this effect in an otherwise standard New Keynesian open economy model with unemployment as in Galí (2010) and find two important results with respect to expansionary monetary policy shocks: First, the usual wealth effect in New Keynesian models of a declining labor force, which is at odds with the data as highlighted by Christiano, Trabandt and Walentin (2010), is shut down. Second, the welfare effects of such shocks improve considerably, modifying the standard results of the open economy literature that set off with Obstfeld and Rogoff's (1995) redux model. --
    Keywords: open economy macroeconomics,monetary policy,unemployment
    JEL: E24 E52 F32 F41
    Date: 2011
  15. By: Jean-Charles Hourcade (CIRED, Centre International de Recherche sur l'Environnement et le Développement); Antonin Pottier (CIRED, Centre International de Recherche sur l'Environnement et le Développement); Etienne Espagne (CIRED, Centre International de Recherche sur l'Environnement et le Développement)
    Abstract: This paper discusses the growth model with environmental constraints recently presented in (Acemoglu et al., 2011) which focuses on the redirection of technical change by climate policies with research subsidies and a carbon tax. First, Acemoglu et al.'s model and chosen parameters yield numerical results that do not support the conclusion that ambitious climate policies can be conducted “without sacrificing (much or any) long-run growth”. Second, they select unrealistic key parameters for carbon sinks and elasticity of substitution. We find that more realistic parameters lead to very different results. Third, the model leads to an unrealistic conclusion when used to analyse endogenous growth, suggesting specification problems.
    Keywords: Technological Change, Endogenous Growth, Climate, Energy Substitutability
    JEL: O30 O33 Q43 Q54 Q56
    Date: 2011–12
  16. By: José Mustre-del-Río
    Abstract: This paper examines the Frisch elasticity at the extensive margin of labor supply in an economy consistent with the observed dispersion in average employment rates across individuals. An incomplete markets economy with indivisible labor is presented where agents differ in their disutility of labor and market skills. The model's key parameters are estimated using indirect inference with panel data from the National Longitudinal Survey of the Youth-NLSY. The estimated model implies an elasticity of aggregate employment of 0.71. A simple decomposition reveals that labor disutility dierences, which capture the dispersion in employment rates, are crucial for this quantitative result. These differences alone generate an elasticity of 0.69. Meanwhile, skill differences alone imply an elasticity of 1.1. These results suggest that the literature generates large employment elasticities by ignoring individual labor supply differences.
    Date: 2011
  17. By: Martin Berka; Christian Zimmermann
    Abstract: This paper studies loan activity in a context where banks must follow Basel Accord-type rules and acquire financing from households. Loan activity typically decreases when entrepreneurs’ investment returns decline, and we study which type of policy could revigorate an economy in a trough. We find that active monetary policy increases loan volume even when the economy is in good shape; introducing active capital requirement policy can be effective as well if it implies tightening of regulation in bad times. This is performed with an heterogeneous agent economy with occupational choice, financial intermediation and aggregate shocks to the distribution of entrepreneurial returns.
    Date: 2011
  18. By: Richard M. H. Suen (University of Connecticut)
    Abstract: This paper analyzes the connection between time preference heterogeneity and economic inequality. To achieve this, we extend the standard neoclassical growth model by introducing three additional features, namely (i) heterogeneity in consumers’ discount rates, (ii) direct preferences for wealth, and (iii) human capital formation. The second feature prevents the wealth distribution from collapsing into a degenerate distribution. The third feature generates a strong positive correlation between earnings and capital income across consumers. A calibrated version of the model is able to generate patterns of wealth and income inequality that are very similar to those observed in the United States.
    Keywords: Inequality, Heterogeneity, Time Preference, Human Capital
    JEL: D31 E21 O15
    Date: 2012–01
  19. By: Dudley Cooke
    Abstract: This paper studies non-cooperative monetary policy in a two country general equilibrium model where international economic integration is endogenised through firm-level heterogeneity and monopolistic competition. Economic integration between countries is a source of policy competition, generating higher long-run inflation, and increased gains from monetary cooperation.
    Keywords: Price levels ; Macroeconomics - Econometric models
    Date: 2012
  20. By: Guillaume Chevillon (ESSEC Business School - ESSEC Business School); Sophocles Mavroeidis (Chercheur Indépendant - Aucune)
    Abstract: We consider a prototypical representative-agent forward-looking model, and study the low frequency variability of the data when the agent's beliefs about the model are updated through linear learning algorithms. We nd that learning in this context can generate strong persistence. The degree of persistence depends on the weights agents place on past observations when they update their beliefs, and on the magnitude of the feedback from expectations to the endogenous variable. When the learning algorithm is recursive least squares, long memory arises when the coe cient on expectations is su ciently large. In algorithms with discounting, long memory provides a very good approximation to the low-frequency variability of the data. Hence long memory arises endogenously, due to the self-referential nature of the model, without any persistence in the exogenous shocks. This is distinctly di erent from the case of rational expectations, where the memory of the endogenous variable is determined exogenously. Finally, this property of learning is used to shed light on some well-known empirical puzzles.
    Keywords: Learning ; Long Memory ; Persistence ; Present-Value Models
    Date: 2011–11–24
  21. By: Wang Peng (Institute for Advanced Studies, Wuhan University); Heng-fu Zou (Institute for Advanced Studies, Wuhan University; CEMA in Central University of Finance and Economics)
    Abstract: This paper reexamines the capital accumulation within a neo-classical growth model under the assumption of hyperbolic discounting as well as endogenous preference, finding that 1) two kinds of Naifs¡¯ behavior coincides under log utility; 2) increasing marginal impatience due to capital accumulation itself will negatively affect the steady state locus of consumption and capital; 3) the effect of hyperbolic settings through effective rate of preference is still ambiguous; 4) we prove the saddle-point equilibrium property for the steady state under various assumptions about individual¡¯s preference. Our model also justifies Max Weber's idea that although spirit of capitalism is an engine to capital accumulation, the subsequent growing wealth will damage this engine.
    Keywords: hyperbolic discounting, time-inconsistent, capital accumulation, spirit of capitalism
    JEL: D90 E13
    Date: 2012
  22. By: Thomas von Brasch, Johan Byström and Lars PetterLystad (Statistics Norway)
    Abstract: We bridge mathematical number theory with that of optimal control and show that a generalised Fibonacci sequence enters the control function of finite horizon dynamic optimisation problems with one state and one control variable. In particular, we show that the recursive expression describing the first-order approximation of the control function can be written in terms of a generalised Fibonacci sequence when restricting the final state to equal the steady state of the system. Further, by deriving the solution to this sequence, we are able to write the first-order approximation of optimal control explicitly. Our procedure is illustrated in an example often referred to as the Brock-Mirman economic growth model.
    Keywords: Fibonacci sequence; Golden ratio; Mathematical number theory; Optimal control.
    Date: 2012–01
  23. By: Lockwood, Ben (University of Warwick)
    Abstract: This paper considers the optimal taxation of savings intermediation and payment services in a dynamic general equilibrium setting, when the government can also use consumption and income taxes. When payment services are used in strict proportion to …nal consumption, and the cost of intermediation services is …xed and the same across …rms, the optimal taxes are generally indeterminate. But, when …rms di¤er exogenously in the cost of intermediation services, the tax on savings intermediation should be zero. Also, when household time and payment services are substitutes in transactions, the optimal tax rate on payment services is determined by the returns to scale in the conditional demand for payment services, and is generally di¤erent to the optimal rate on consumption goods. In particular, with constant returns to scale, payment services should be untaxed. These results can be understood as applications of the Diamond-Mirrlees production e¢ciency theorem. Finally, as an extension, we endogenize intermediation, in the form of monitoring, and show that it may be oversupplied in equilibrium when banks have monopoly power, justifying a Pigouvian tax in this case.
    Keywords: Financial intermediation services, tax design, banks, monitoring,payment services
    Date: 2011
  24. By: John B. Donaldson; Natalia Gershun; Marc P. Giannoni
    Abstract: We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. A generic family of compensation contracts similar to those employed in practice is studied. When compensation is convex in the firm’s own dividend (or share price), a given increase in the firm’s output generated by an additional unit of physical investment results in a more than proportional increase in the manager’s income. Incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general equilibrium, one in which business cycles are driven by self-fulfilling fluctuations in the manager’s expectations that are unrelated to the economy’s fundamentals. Arbitrarily large fluctuations in macroeconomic variables may result. We also provide a theoretical justification for the proposed family of contracts by demonstrating that they yield first-best outcomes for specific parameter choices.
    Date: 2011
  25. By: Wang Peng (Institute for Advanced Studies, Wuhan University); Heng-fu Zou (Institute for Advanced Studies, Wuhan University; CEMA in Central University of Finance and Economics)
    Abstract: Under a modified neo-classical framework, this paper reexamined the effect of international macroeconomic policies by rejecting the routine assumption of a constant rate of time preference. In the model presented here, we suppose the holdings of real financial wealth will affect people's impatience which has far-reaching implications towards various core issues in international macroeconomics. The introducing of wealth into instantaneous discounting function yields intriguing dynamics of consumption, real balances, and foreign bond holdings. One interesting feature of our model is that stationary rate of time preference no longer necessarily equals real interest rate. We also find that central bank's foreign exchange intervention is not super-neutral even if households capitalize all transfers from the government, which contradicts Obstfeld(1981) in that the distribution of the economy¡¯s claims on the rest of the world between the public and the central bank is relevant to the economic performance. The monetary policy affects the real factors, but how the economy behaves in the long run and in the short run differs a lot from Uzawa(1968) and Obstfeld(1981).
    Keywords: international macroeconomic policy, impatience, foreign exchange, monetary policy
    JEL: D90 F3 F4
    Date: 2012
  26. By: Thomas W.L. Norman
    Abstract: Models of macroeconomic learning are populated by agents who possess a great deal of knowledge of the “true” structure of the economy, and yet ignore the impact of their own learning on that structure; they may learn about an equilibrium, but they do not learn within it. An alternative learning model is presented where agents’ decisions are informed by hypotheses they hold regarding the economy. They periodically test these hypotheses against observed data, and replace them if they fail. It is shown that agents who learn in this way spend almost all of the time approximating rational-expectations equilibria.
    Keywords: Rational-expectations equilibrium, Learning, Hypothesis testing
    JEL: E00 D83 D84
    Date: 2012
  27. By: David Andolfatto; Aleksander Berentsen; Christopher J. Waller
    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.
    Date: 2012

This nep-dge issue is ©2012 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.