Information Choice and Amplification of Financial Crises

73 Pages Posted: 8 Jun 2016

See all articles by Toni Ahnert

Toni Ahnert

European Central Bank, Financial Research Division; Centre for Economic Policy Research (CEPR)

Ali Kakhbod

University of California, Berkeley

Date Written: May 2016

Abstract

We propose an amplification mechanism of financial crises based on the information choice of investors. Adverse news about the solvency of a debtor raises the value of private information and therefore induces the acquisition of information. Informed investors rely more on private information and refuse to roll over debt more often than uninformed investors. This amplifies the probability of a debt crisis. To enhance financial stability, a policymaker can use taxes and subsidies to affect information acquisition. We also derive implications about the magnitude of amplification and discuss how these can be tested.

Keywords: amplification, financial crises, global games, information choice

JEL Classification: D83, G01

Suggested Citation

Ahnert, Toni and Kakhbod, Ali, Information Choice and Amplification of Financial Crises (May 2016). Available at SSRN: https://ssrn.com/abstract=2791679 or http://dx.doi.org/10.2139/ssrn.2791679

Toni Ahnert

European Central Bank, Financial Research Division ( email )

ECB Tower
Sonnemannstraße 20
Frankfurt am Main

HOME PAGE: http://toniahnert.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ali Kakhbod (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

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