Informational Externalities, Strategic Delay, and the Search for Optimal Policy

This paper examines optimal policy when agents, private investors and a government, can learn about the economy by observing others. Investors can delay investment in order to exploit future information. Importantly, investors ignore the informational value of their actions to others when deciding: this externality results in inefficiently high delay, motivating government intervention. The government searches for the optimal policy, while learning about the economy. Complications arise since investors are aware of any systematic component to policy and may respond perversely to government initiatives. The paper characterizes the optimal government policy and shows that the government achieves its desired outcome.