<http://www.federalreserve.gov/boarddocs/speeches/2002/200209252/>
>No one can deny that fully informed market participants will
>generate the most efficient pricing of resources and the most
>efficient allocation of capital. Moreover, it could be argued that,
>if all information held by individual buyers or sellers became
>available to all participants, the pricing structure would more
>closely reflect the underlying balance of supply and demand. Thus
>full information would appear to be the unambiguous objective. But
>should it be?
>
>Take, for example, the real estate developer who conceives of an
>innovative project that will significantly raise the value of the
>land on which it will be situated--provided that the site possesses
>suitable characteristics. Suppose further that it is costly for the
>developer to determine whether a given site is suitable. If he or
>she discovers a suitable site and is able to quietly purchase the
>land from its current owners without revealing the value of the
>project, the developer makes a substantial profit, and the community
>overall presumably benefits from improved land use.
>
>But what if, before the purchase of the land, the developer was
>required to disclose his or her purchase intentions and, in
>particular, the value enhancement created by the project? The
>sellers then seeing the bigger picture would elevate their offers
>sufficiently high to extract the full value of the innovation from
>the developer. Under these circumstances, would any projects go
>forward? Clearly not, because developers would be unwilling to bear
>the cost of evaluating potential sites knowing that they would reap
>none of the benefit of discovering suitable ones. A requirement for
>fuller disclosure of the potential, heretofore undiscovered value of
>the land would engender neither more disclosure nor improved land
>use.
>
>An example more immediate to current regulatory concerns is the
>issue of regulation and disclosure in the over-the-counter
>derivatives market. By design, this market, presumed to involve
>dealings among sophisticated professionals, has been largely exempt
>from government regulation. In part, this exemption reflects the
>view that professionals do not require the investor protections
>commonly afforded to markets in which retail investors participate.
>But regulation is not only unnecessary in these markets, it is
>potentially damaging, because regulation presupposes disclosure and
>forced disclosure of proprietary information can undercut
>innovations in financial markets just as it would in real estate
>markets.
>
>All participants in competitive markets seek innovations that yield
>above-normal returns. In generally efficient markets, few find such
>profits. But those that do exploit such discoveries earn an abnormal
>return for doing so. In the process, they improve market efficiency
>by providing services not previously available.