Information Choice and Amplification of Financial Crises

Toni Ahnert and Ali Kakhbod

The Review of Financial Studies, 2017, vol. 30, issue 6, 2130-2178

Abstract: We propose an amplification mechanism of financial crises based on the information choices of investors. Information acquisition makes investors more likely to act against their prior. Deteriorating public news under an initially strong (weak) prior increases (reduces) the value of private information and induces more (less) information acquisition. Deteriorating public news increases the probability of a crisis, since the initially strong (weak) prior induces no attacks (attacks). This effect is amplified with endogenous information choices. To enhance financial stability, a policy maker affects information acquisition via taxes and subsidies. We derive and discuss testable implications for the magnitude of amplification.

JEL-codes: D82 F31 G01 G12 G21 G28 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (19)

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Working Paper: Information, Amplification and Financial Crisis (2014)
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