Working Paper: CEPR ID: DP16484
Authors: Alessandro Pavan; Nicolas Inostroza
Abstract: We study robust/adversarial information design in global games, with an application to stress testing. We show that the optimal policy coordinates all market participants on the same course of action. Importantly, while it removes any “strategic uncertainty,” it preserves heterogeneity in “structural uncertainty” (that is, in beliefs over payoff fundamentals). We identify conditions under which the optimal policy is a “pass/fail” test, show that the optimal test need not be monotone in fundamentals, but also identify conditions under which it is monotone. Finally, we show how the effects of an increase in market uncertainty on the toughness of the optimal stress test depend on the securities issued by the banks.
Keywords: global games; coordination under incomplete information; bayesian persuasion; adversarial information design; stress tests
JEL Codes: D83; G28; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal policy (C61) | coordination of market participants (D47) |
| information disclosure (D82) | agents' beliefs about fundamentals (D84) |
| information disclosure (D82) | strategic behavior of agents (C70) |
| optimal policy (C61) | elimination of strategic uncertainty (D84) |
| optimal policy (C61) | structural uncertainty remains (D89) |
| optimal policy (C61) | simple pass-fail test (C52) |
| monotone rules (E61) | optimal policies under certain conditions (C61) |