Working Paper: CEPR ID: DP15792
Authors: Ricardo Alonso; Konstantinos Zachariadis
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 Codes: D83; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor information (G24) | Effectiveness of stress tests (C52) |
| Quality of private information (D82) | Crowding-in or crowding-out of private investment (F21) |
| Investors' optimism (G31) | Regulator's information disclosure (G18) |
| Investors' pessimism (G41) | Crowding-out of private investment (E22) |
| Regulator's optimal stress test design (G28) | Investors' prior beliefs (G40) |
| Investors' expertise (G11) | Regulator's optimal test design (C52) |