Working Paper: NBER ID: w30548
Authors: Thomas R. Covert; Richard L. Sweeney
Abstract: We analyze how information disclosure policy affects investment efficiency in non-cooperative settings with information externalities. In a two-firm, two-period model, we characterize equilibrium behavior under policies which disclose whether investment returns exceed a predefined level. These policies include complete secrecy, in which players only observe rival actions, as well as full disclosure, in which players also perfectly observe rival returns. With less disclosure (higher disclosure thresholds), there is less free riding, but additional losses from incomplete information aggregation. We characterize the surplus maximizing disclosure threshold in this environment, and show how it depends on firms' patience. We then apply the model to the early years of the shale boom in Pennsylvania and West Virginia, which at the time were governed by complete secrecy and full disclosure, respectively. We find that full disclosure would have maximized surplus in both states, generating 49% and 160% more value than complete secrecy.
Keywords: information disclosure; investment efficiency; noncooperative settings; shale boom
JEL Codes: D82; L51; L71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| complete secrecy (Y50) | reduced free riding (H40) |
| complete secrecy (Y50) | additional losses from incomplete information aggregation (D89) |
| full disclosure (G18) | maximized surplus in Pennsylvania (D69) |
| full disclosure (G18) | maximized surplus in West Virginia (D69) |
| full disclosure (G18) | earlier and more frequent investment in Pennsylvania (R42) |
| full disclosure (G18) | more efficient drilling outcomes in West Virginia (L71) |
| maximum nondistortionary disclosure policy (H21) | higher welfare than complete secrecy (I39) |