Policy with Dispersed Information

George-Marios Angeletos and Alessandro Pavan

No 13590, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: C72 D62 D82 (search for similar items in EconPapers)
Date: 2007-11
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Angeletos, G.-M. and Pavan, A. (2009), POLICY WITH DISPERSED INFORMATION. Journal of the European Economic Association, 7: 11–60. doi: 10.1162/JEEA.2009.7.1.11

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Related works:
Journal Article: Policy with Dispersed Information (2009)
Working Paper: Policy with Dispersed Information (2008)
Working Paper: Policy with Dispersed Information (2008)
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