Optimal Disclosure Policy and Undue Diligence

While both public and private financial agencies supply asset marketswith large amounts of information, they do not generally disclose all assetrelatedinformation to the general public. This observation leads us to askwhat principles might govern the optimal disclosure policy for an assetmanager or financial regulator. To investigate this question, we study theproperties of a dynamic economy endowed with a risky asset, and withindividuals that lack commitment. Information relating to future asset returnsis available to society at zero cost. Legislation dictates whether thisinformation 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—whatwe call undue diligence—at sufficiently low cost. Information disclosure isdesirable, in other words, only to the extent that individuals can easilydiscover it for themselves.