Optimal Opacity on Financial Markets

We analyze the incentives for information disclosure in financial
markets. We show that borrowers may have incentives to voluntarily
withhold information and that doing so is most attractive for
claims that are inherently hard to value, such as portfolios of
subprime mortgages. Interestingly, opacity may be optimal even
though it increases informational asymmetries between contracting
parties. Finally, in our setting a government can intervene in ways
that ensure the liquidity of financial markets and that resemble
the initial plans for TARP. Even if such interventions are ex-post
optimal, they affect incentives for information disclosure and have
ambiguous ex-ante effects.