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Persuading Large Investors

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  • Alonso, Ricardo
  • Zachariadis, Konstantinos

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.

Suggested Citation

  • Alonso, Ricardo & Zachariadis, Konstantinos, 2021. "Persuading Large Investors," CEPR Discussion Papers 15792, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15792
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    References listed on IDEAS

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    1. Goldstein, Itay & Leitner, Yaron, 2018. "Stress tests and information disclosure," Journal of Economic Theory, Elsevier, vol. 177(C), pages 34-69.
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    More about this item

    Keywords

    Information design; Bayesian persuasion; Stress tests; Financial disclosure; Endogenous public signal;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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