THE VALUE OF INFORMATION AND THE OPTIMAL GOVERNMENTAL GUARANTEE ON ITS AGENCIES' ISSUES.

This paper, a theoretically oriented presentation, examines the social optimality of the current policy of one-hundred per cent guarantees for public agencies' debt issues. The analysis suggests and explores an alternative policy: Coordinating debt repayment with the performance of the assets underlying the debt. The limits of this alternative are analyzed under conditions of uncertainty, characterized by imperfect and expensive information. The first section of the paper will introduce the problem of socially optimal agency debt policy. The classical solution for the optimal agency behavior and its modifications, necessitated by costly imperfect information, will be the focus of the following two sections. The analysis in the next two sections will examine optimal agency policy in a state-preference world utilizing a Pareto criteria for social welfare. The final section of the paper will study the implications for agency optimality in a log utility/channel capacity information world. [ABSTRACT FROM AUTHOR]