Government Information Transparency∗

This paper studies a model of announcements by a privately informed government about the future state of the economic activity in an economy subject to recurrent shocks and with distortions due to income taxation. Although transparent communication would ex ante be desirable, we find that even a benevolent government may ex-post be non-informative, in an attempt to countervail the tax distortion with a ‘second best’ compensating distortion in information. This result provides a rationale for independent national statistical offices, committed to truthful communication. We also find that whether inequality in income distribution favors or harms government transparency depends on labor supply elasticity. JEL-Classification: D82, E61 Key-words: Government announcements, Cheap talk, Asymmetric information, Inequality ∗We thank Francesca Barigozzi, Jordi Caballé, Antonio Cabrales, Hector Calvo Pardo, Giacomo Calzolari, Matteo Cervellati, Nicola Pavoni, Debraj Ray and seminar participants in Bologna and Barcelona for useful comments. Esteban is a member of the Barcelona Graduate School of Economics and is grateful for support from the Generalitat de Catalunya and the CICYT (SEJ2006-00369) and from the Instituto de Estudios Fiscales. †Department of Economics, Birmingham University; email: [email protected] ‡Instituto de Análisis Económico (CSIC), Barcelona; email: [email protected] §Department of Economics, Università di Bologna; email: [email protected]