Persuading Large Investors

70 Pages Posted: 22 Feb 2021

See all articles by Ricardo Alonso

Ricardo Alonso

London School of Economics & Political Science (LSE) - Department of Management

Konstantinos E. Zachariadis

School of Economics and Finance, Queen Mary University of London

Multiple version iconThere are 2 versions of this paper

Date Written: February 8, 2021

Abstract

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

Alonso, Ricardo and Zachariadis, Konstantinos E., Persuading Large Investors (February 8, 2021). Available at SSRN: https://ssrn.com/abstract=3781499 or http://dx.doi.org/10.2139/ssrn.3781499

Ricardo Alonso

London School of Economics & Political Science (LSE) - Department of Management ( email )

United Kingdom

HOME PAGE: http://www.lse.ac.uk/management/people/ralonso.aspx

Konstantinos E. Zachariadis (Contact Author)

School of Economics and Finance, Queen Mary University of London ( email )

Graduate Centre
Mile End Campus
London, E1 4NS
United Kingdom
+44 20 7882 8698 (Phone)

HOME PAGE: http://www.konstantinosezachariadis.com

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