45 Pages Posted: 11 Mar 2020 Last revised: 4 Dec 2020
Date Written: January 15, 2020
We study optimal dynamic information disclosure in a regime change setting. A shock arrives at some stochastic date. The agents can preemptively attack at any time, where the attack is irreversible, and waiting is costly. This may create a panic --- agents attack expecting others to attack, causing regime change even when the fundamental does not warrant it. The principal prefers the regime to survive and wants to minimize the chance of panic. We construct a simple optimal disclosure policy that resembles forward-looking stress tests. The principal sets a disaster alert, which, at a given future date, gets triggered if it becomes evident that the regime will change regardless of the agents' actions thereafter. A timely disaster alert serves as an early warning. Under the unique rationalizable strategy, agents ignore their private information, wait for, and then follow the alert. This policy perfectly coordinates the agents' actions and eliminates panic.
Keywords: Coordination, Information Design, Panic
JEL Classification: D02, D82, D83, G28
Suggested Citation: Suggested Citation