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Persuading large investors

Author

Listed:
  • Alonso, Ricardo
  • Zachariadis, Konstantinos E.

Abstract

A regulator who designs a public stress test to avert default of a distressed bank via private investment 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 an endogenous more (less) informative signal to better-informed investors. We show that crowding-in occurs as long as investors remain responsive to public news and they are sufficiently well informed: the regulator's test perfectly reveals the state as investors' become privately perfectly informed. Investors' value from more precise private signals may come from their effect on the public test's precision.

Suggested Citation

  • Alonso, Ricardo & Zachariadis, Konstantinos E., 2024. "Persuading large investors," LSE Research Online Documents on Economics 126040, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:126040
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    References listed on IDEAS

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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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