Government intervention and information aggregation by prices
Itay Goldstein and
Philip Bond
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Itay Goldstein: University of Pennsylvania
Philip Bond: University of Minnesota
No 225, 2012 Meeting Papers from Society for Economic Dynamics
Abstract:
Market prices are thought to contain a lot of useful information. Hence, government regulators (and other economic agents) are often urged to use market prices to guide decisions. An important issue to consider is the endogeneity of market prices and how they are affected by the prospect of government intervention. We show that if the government learns from the price when taking a corrective action, it might reduce the incentives of speculators to trade on their information, and hence reduce price informativeness. We show that transparency may reduce trading incentives and price informativeness further. Diametrically opposite implications hold for the alternative case in which the government's action amplifies the effect of underlying fundamentals. We derive implications for the optimal use of market information and for the government's incentives to produce its own information
Date: 2012
New Economics Papers: this item is included in nep-cta and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:225
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