University of Pennsylvania ScholarlyCommons Publicly Accessible Penn Dissertations 2018 Political Economy Of Transparency Raphael Galvao University of Pennsylvania, [email protected] Follow this and additional works at: https://repository.upenn.edu/edissertations Part of the Economics Commons Recommended Citation Galvao, Raphael, "Political Economy Of Transparency" (2018). Publicly Accessible Penn Dissertations. 2899. https://repository.upenn.edu/edissertations/2899 This paper is posted at ScholarlyCommons. https://repository.upenn.edu/edissertations/2899 For more information, please contact [email protected]. Political Economy Of Transparency Abstract This dissertation studies public policy in coordination environments, where there is complementarity in the agents' actions. The first chapter studies a model of currency attacks in which the government can choose a credible signal about the fundamentals of the economy. Public signals create partial common knowledge that can lead to multiple equilibria. The optimal policy with commitment is characterized when, if there is multiplicity, the government only cares about its lowest equilibrium payoff. In this case, the public signal is informative and leads to a unique equilibrium, which is preferred to a full disclosure policy. Our results indicate that the government has incentives for being vague in its communication. The highest equilibrium payoff for the government can be achieved with a two-signal policy. In equilibrium, agents follow the public signal and take the same action: either there is a coordinated attack, or all speculators refrain from attacking. The second paper develops a model where short-term reputation concerns guide the public disclosure of information. There are and high and low states that determine the productivity of investment, and the high state is more likely if the government is efficientather r than inefficient. Governments know the state and make public reports with the objective to be perceived as efficient. I find that the inefficient government is never completely truthful in equilibrium. When the efficient vgo ernment is truthful, the inefficient government sends false reports of a high state with positive probability. This creates uncertainty following the report of a high state: if the true state is high, productivity is underestimated; if the true state is low, productivity is overestimated. This bias reduces welfare in the high state, but there is a tradeoff in the low state: marginal entrepreneurs lose from overestimating productivity; all entrepreneurs gain from a higher aggregate investment. I show that when the trust in the government's report is low, the inefficient vgo ernment can improve welfare in the low state by sending false reports that increase investment. However, as the trust in the false reports rises, the bias in entrepreneurs' beliefs becomes large and welfare decreases. Degree Type Dissertation Degree Name Doctor of Philosophy (PhD) Graduate Group Economics First Advisor Guillermo Ordonez Subject Categories Economics This dissertation is available at ScholarlyCommons: https://repository.upenn.edu/edissertations/2899 POLITICAL ECONOMY OF TRANSPARENCY Raphael de Albuquerque Galv~ao A DISSERTATION in Economics Presented to the Faculties of the University of Pennsylvania in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy 2018 Supervisor of Dissertation Guillermo Ordo~nez,Professor of Economics Graduate Group Chairperson Jesus Fernandez-Villaverde, Professor of Economics Dissertation Committee Harold Cole, Professor of Economics Dirk Krueger, Professor of Economics Guillermo Ordo~nez,Professor of Economics ABSTRACT POLITICAL ECONOMY OF TRANSPARENCY Raphael de Albuquerque Galv~ao Guillermo Ordo~nez This dissertation studies public policy in coordination environments, where there is com- plementarity in the agents' actions. The first chapter studies a model of currency attacks in which the government can choose a credible signal about the fundamentals of the econ- omy. Public signals create partial common knowledge that can lead to multiple equilibria. The optimal policy with commitment is characterized when, if there is multiplicity, the government only cares about its lowest equilibrium payoff. In this case, the public signal is informative and leads to a unique equilibrium, which is preferred to a full disclosure policy. Our results indicate that the government has incentives for being vague in its communica- tion. The highest equilibrium payoff for the government can be achieved with a two-signal policy. In equilibrium, agents follow the public signal and take the same action: either there is a coordinated attack, or all speculators refrain from attacking. The second paper develops a model where short-term reputation concerns guide the public disclosure of information. There are and high and low states that determine the productivity of investment, and the high state is more likely if the government is efficient rather than inefficient. Governments know the state and make public reports with the objective to be perceived as efficient. I find that the inefficient government is never completely truthful in equilibrium. When the efficient government is truthful, the inefficient government sends false reports of a high state with positive probability. This creates uncertainty following the report of a high state: if the true state is high, productivity is underestimated; if the true state is low, productivity is overestimated. This bias reduces welfare in the high state, but there is a tradeoff in the low state: marginal entrepreneurs lose from overestimating productivity; all entrepreneurs gain from a higher aggregate investment. I show that when the trust in the government's ii report is low, the inefficient government can improve welfare in the low state by sending false reports that increase investment. However, as the trust in the false reports rises, the bias in entrepreneurs' beliefs becomes large and welfare decreases. iii TABLE OF CONTENTS ABSTRACT . i LIST OF TABLES . iv LIST OF ILLUSTRATIONS . v CHAPTER 1 : CURRENCY ATTACKS AND GOVERNMENT COMMUNICATION 1 1.1 Introduction . 1 1.2 A simple example . 5 1.3 Model . 9 1.4 Optimal signal structure . 16 1.5 No commitment . 27 1.6 Conclusion . 30 CHAPTER 2 : REPUTATION AND TRANSPARENCY . 32 2.1 Introduction . 32 2.2 The Model . 37 2.3 Optimal Disclosure Policy . 42 2.4 Investment and Welfare . 48 2.5 Conclusion . 54 APPENDIX . 56 BIBLIOGRAPHY . 106 iv LIST OF TABLES TABLE 1 : Partition choices . 25 v LIST OF ILLUSTRATIONS FIGURE 1 : Size of attacks . 60 FIGURE 2 : Government's payoff . 61 vi CHAPTER 1 : CURRENCY ATTACKS AND GOVERNMENT COMMUNICATION with Felipe Shalders 1.1. Introduction Informed governmental agencies are often criticized for the poor quality of the information they release. Referring to the early years of Alan Greenspan as head of the Fed, Blinder and Reis (2005) write: Soon Greenspan, who is far from plainspoken in any case, became known for such memorable phrases as 'mumbling with great incoherence'- which he used (with a hint of humor) to characterize his own version of Fedspeak. In this paper, we argue that it is optimal for the government to be vague in its communi- cation. This happens because government's preferences do not coincide with preferences of other economic agents. When the government has access to payoff relevant information, it needs to be vague in order to induce agents to take the government's most preferred action. We analyze the environment where a government can release a public signal about the fun- damentals of the economy. In our model, the government would like to maintain a currency peg. The peg can be attacked by a continuum of speculators, who wish to profit from a currency devaluation. Payoffs depend on the state of fundamentals of the economy, the action taken by speculators, and the government's choice between defending or abandoning the peg. If fundamentals are weak (low states), speculators can have large profits from attacking the currency and the government has to pay a high cost to maintain the peg; if fundamentals are strong (high states), speculators can have at most small profits from attacking the currency and the cost of defending the peg is low. The cost of maintain the peg is increasing in the number of speculators that attack the currency. 1 Following Morris and Shin (1998), we assume that speculators receive noisy private signals about the fundamentals. Thus, if public signals are imprecise, one could expect them to have small effects on speculators beliefs about the state of fundamentals. This raises the question: why are vague announcements effective? When information is dispersed across speculators, an imprecise signal about the fundamen- tals can have large effects because it changes the beliefs of a speculator about what other speculators believe. If the government can delegate to an informed and independent agency (such as the Fed) the mission to send a public signal (such as the FOMC statements) about the state of fundamentals, this public signal generates partial common knowledge about the unknown state. Thus, government communication induces coordination among speculators, even if the public signal has a low precision. In our model, the government chooses an arbitrary partition of the space of fundamentals. The public signal reveals in which element of the partition the true fundamentals lie. Only truthful signals are allowed. Given the common prior and the private and public signals,