Timely Persuasion

38 Pages Posted: 11 Mar 2020

See all articles by Deepal Basak

Deepal Basak

Indian School of Business

Zhen Zhou

Tsinghua University - PBC School of Finance

Date Written: January 15, 2020

Abstract

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

Basak, Deepal and Zhou, Zhen, Timely Persuasion (January 15, 2020). Indian School of Business, Available at SSRN: https://ssrn.com/abstract=3540708 or http://dx.doi.org/10.2139/ssrn.3540708

Deepal Basak

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

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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