Panics and Early Warnings

Abstract

This paper studies dynamic persuasion under adversarial selection in regime change games where the agents choose when to attack, and delay is costly. We construct a simple optimal disclosure policy called “timely disaster alert,” which promptly warns agents about the impending crisis. This policy induces perfect coordination on the right course of action --- the unique rationalizable strategy is to wait for and follow the alert, regardless of private signals. Thus, the optimal policy eliminates panic in the robust sense. We relate this optimal policy to practical early warning systems, such as forward-looking bank stress tests and debt sustainability analysis.

Keywords: Dynamic Information Design, Dynamic Coordination, Robust Design, First-mover Advantage, Regime Change, Early Warning, Panic

JEL Classification: D02, D82, D83, G28