38 Pages Posted: 11 Mar 2020
Date Written: January 15, 2020
We propose a simple dynamic information disclosure policy that eliminates panic. Panic occurs when some agents take an undesirable action (attack) because they fear that other agents will behave similarly, and thus causing regime change even though it is unwarranted. We consider a mass of privately informed agents who can attack a regime at any point within a time window. The attack is irreversible, waiting is costly, and the waiting cost is continuous. The policy we propose is called “disaster alert,” which, at a given time, publicly discloses whether the regime is going to change regardless of the future actions of agents. We show that a timely alert persuades agents to wait for the alert and not attack if the alert is not triggered, regardless of their private information, thus eliminating panic. We apply this theory to demonstrate how forward-looking stress tests can help stop bank runs.
Keywords: Coordination, Information Design, Panic
JEL Classification: D02, D82, D83, G28
Suggested Citation: Suggested Citation