Persuading large investors

Ricardo Alonso and Konstantinos E. Zachariadis

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: A regulator who designs a public stress test to avert default of a distressed bank via private investment 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 an endogenous more (less) informative signal to better-informed investors. We show that crowding-in occurs as long as investors remain responsive to public news and they are sufficiently well informed: the regulator's test perfectly reveals the state as investors' become privately perfectly informed. Investors' value from more precise private signals may come from their 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)
Pages: 26 pages
Date: 2024-12-31
New Economics Papers: this item is included in nep-fdg and nep-gth
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Published in Journal of Economic Theory, 31, December, 2024, 222. ISSN: 0022-0531

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:126040

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