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

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