Timely Persuasion

45 Pages Posted: 11 Mar 2020 Last revised: 4 Dec 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 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

Basak, Deepal and Zhou, Zhen, Timely Persuasion (January 15, 2020). PBCSF-NIFR Research Paper, 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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