Persuading Large Investors

Ricardo Alonso and Konstantinos Zachariadis

No 15792, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A regulator who designs a public stress test to elicit private investment in a distressed bank must account for large investors’ private information on the bank’s state. We provide conditions for crowding-in (crowding-out) so that the regulator offers more (less) information to better-informed investors. Crowding-in obtains if investors’ private information is not too discriminating of the state. We show that the region of the common prior is consequential: if crowding-in occurs for ex-ante optimistic investors then crowding-out follows if they were instead pessimistic. Investors’ value from more precise private signals may come from the effect on the public test’s precision.

Keywords: Information design; Bayesian persuasion; Stress tests; Financial disclosure; Endogenous public signal (search for similar items in EconPapers)
JEL-codes: D83 G21 G28 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-gth
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