Panics and Early Warnings

45 Pages Posted: 11 Mar 2020 Last revised: 8 Nov 2022

See all articles by Deepal Basak

Deepal Basak

Kelley School of Business, Indiana University

Zhen Zhou

Tsinghua University - PBC School of Finance

Date Written: Sep 15, 2022

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

Suggested Citation

Basak, Deepal and Zhou, Zhen, Panics and Early Warnings (Sep 15, 2022). PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=3540708 or http://dx.doi.org/10.2139/ssrn.3540708

Deepal Basak

Kelley School of Business, Indiana University ( email )

1309 E 10th St
Bloomington, IN 47405-1701
United States

HOME PAGE: http://https://sites.google.com/a/nyu.edu/dbasak/home

Zhen Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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