State-Promoted Investment for Industrial Reforms: An Information Design Approach

25 Pages Posted: 16 Jun 2021

See all articles by Keeyoung Rhee

Keeyoung Rhee

Korea Development Institute (KDI)

Myungkyu Shim

Yonsei University - School of Economics

Ji Zhang

Tsinghua University - PBC School of Finance

Date Written: June 10, 2021

Abstract

We analyze the optimal strategy for a government to promote large-scale investment projects under information frictions. Specifically, we propose a model where the government collects information on profitability of each investment and discloses it to private investors a la Kamenica and Gentzkow(2011). We derive the government's optimal information policy, which is characterized as threshold values for the unknown profitability of the projects released to the private investors, and study how the underlying features of the economy affect the optimal policies. We find that when multiple projects are available, the government promotes the project with a bigger spillover effect by fully revealing the true state of the economy only when its profitability is substantially high. Moreover, the development of the financial/information market also affects the optimal rule.

Keywords: Bayesian persuasion, information friction, state-promoted investments

JEL Classification: D80, G18

Suggested Citation

Rhee, Keeyoung and Shim, Myungkyu and Zhang, Ji, State-Promoted Investment for Industrial Reforms: An Information Design Approach (June 10, 2021). Available at SSRN: https://ssrn.com/abstract=3863734 or http://dx.doi.org/10.2139/ssrn.3863734

Keeyoung Rhee

Korea Development Institute (KDI) ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

Myungkyu Shim

Yonsei University - School of Economics ( email )

Seoul
Korea, Republic of (South Korea)

Ji Zhang (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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