Persuasion in Global Games with Application to Stress Testing

June 2017
Nicolas Inostroza, Alessandro Pavan

We study information design in global games of regime change. We consider both the case in which the designer is constrained to disclose the same information to all market participants, as well as the case in which discriminatory disclosures are possible. In both cases, we show that the optimal policy has the “perfect coordination property”: it coordinates all market participants on the same course of action. Importantly, while the optimal policy removes any “strategic uncertainty,” it preserves (and in some cases, it enhances) heterogeneity in “structural uncertainty”. Under the optimal policy, each agent can perfectly predict the actions of any other agent, but not the beliefs that rationalize such actions. Preserving heterogeneity in structural uncertainty is key to minimizing the risk of regime change. When the policy maker is constrained to public disclosures, the optimal policy takes the form of a simple “pass/fail” test. More generally, it has a “divide-and-conquer” flavor: It combines a pass/fail public announcement with discriminatory disclosures that enhance the dispersion of beliefs among market participants about the underlying economic fundamentals. Lastly, we identify primitive conditions under which the optimal test is monotone i.e., it fails with certainty institutions with weak fundamentals and passes those with strong ones.

Related People
Associated Content