ssrn-3631719

This paper examines the effects of public information release within strategic information acquisition models.
Its unique contribution involves developing a methodology to apply global-game refinement to analyze dynamic complementarity in information acquisition.
Key finding: In the unique global-game equilibrium, public information disclosure can lead to increased private information acquisition, contrary to the prevailing crowding-out effect observed in traditional models.
The crowding-in effect is intensified during periods of high uncertainty and becomes a crowding-out effect in low-uncertainty contexts.
Conclusion: Regulators may underestimate the amount of public information to disclose during recessionary times due to an increased level of uncertainty.

Public information disclosure is critical for effective public policy, especially post-2008 financial crisis integrating financial transparency initiatives like the Dodd-Frank Act.
Financial markets heavily rely on private information acquisition to inform trading, shaping regulators' strategies.
Prior research has established that public information often crowds out private acquisition. However, different conditions, such as strategic complementarity in information acquisition, could affect this dynamic.

The authors utilize a novel global-game technique to derive a unique equilibrium amidst equilibrium multiplicity and complexity in comparative statics.
Initially, they articulate a generic model of information acquisition, providing a framework for applying global-game refinement without prior assumptions of strategic substitutability or complementarity.

Dynamic Complementarity: The model approaches information acquisition with a framework that leverages dynamic trading scenarios to analyze the significance of reselling motivations among investors.
Equilibrium Analysis: Through various rounds of trading, the model illustrates how informed traders' strategies elicit information that simultaneously rewards and reduces knowledgeable stakeholders' incentives.
Results: It is shown that public information disclosure results in equilibrium multi-dimensionality, indicating that regulators must be adept in selecting appropriate specifications of public signals to ensure market stability.

An analysis of strategic interactions indicates:
Public information increases its value, thus incentivizing informed investors to acquire information during high uncertainty phases.
Traditional expectations about information dynamics suggest crowding-out effects only in certain equilibria, but the proposed model illustrates counterexamples amidst high uncertainty.

The model suggests regulators should actively disclose more information in uncertain economic circumstances to stimulate market activity and private investment gathering.
The endogeneity of price informativeness suggests that variations in public information influence real-time decision-making across economic cycles.

Contrast with Classical Models: The findings suggest revisions to the classic Grossman-Stiglitz results, especially regarding the impacts of public disclosure and information acquisition on market functionality.
Extension of Theoretical Frameworks: The authors connect the implications of their findings with a broad array of literature addressing information economics.

The paper proposes that the commonly held notion of public information disclosure invariably diminishing private incentives does not always hold. The strategic environment allows for nuances wherein legislative frameworks can enhance the value of information acquisition in financial markets.
The theoretical frameworks developed herein may extend to various economic settings, generating important insights into the dynamics of public disclosures and their regulatory consequences.