Persuading Large Investors
70 Pages Posted: 22 Feb 2021
Date Written: February 8, 2021
A regulator who designs a public stress test to elicit private investment in a distressed bank must account for large investors' private information on the bank's state. We provide conditions for crowding-in (crowding-out) so that the regulator offers more (less) information to better-informed investors. Crowding-in obtains if investors' private information is not too discriminating of the state. We show that the region of the common prior is consequential: if crowding-in occurs for ex-ante optimistic investors then crowding-out follows if they were instead pessimistic. Investors' value from more precise private signals may come from the effect on the public test's precision.
Keywords: Information Design, Bayesian Persuasion, Stress Tests, Financial Disclosure, Endogenous Public Signal
JEL Classification: D83, G21, G28
Suggested Citation: Suggested Citation