Working Paper: NBER ID: w13590
Authors: Georgemarios Angeletos; Alessandro Pavan
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.
Keywords: dispersed information; government policy; economic efficiency; tax design
JEL Codes: C72; D62; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax policy (H20) | agents' reliance on common information (D82) |
| tax policy (H20) | agents' reliance on idiosyncratic information (D82) |
| marginal taxes based on aggregate activity (H29) | efficiency in information use (D83) |
| payoff externalities and informational externalities (D62) | inefficiencies in decentralized information use (D83) |
| tax policy (H20) | strategic complementarity in individual choices (D10) |