Optimal disclosure policy and undue diligence

Information about asset quality is often not disclosed to asset markets. What principles determine when a financial regulator should disclose or withhold information? We explore this question using a risk-sharing model with intertemporal trade and limited commitment. Information about future asset returns is available to society, but legislation dictates whether this information is disclosed or not. In our environment, nondisclosure is generally desirable except when individuals can access hidden information – what we call undue diligence – at sufficiently low cost. Ironically, information disclosure is desirable only when individuals have a strong incentive to discover it for themselves.