Abstract: When agents anticipate that a future shock could start a crisis, they may take preemptive actions that contribute to the crisis. This can create panic — a crisis even when the fundamental does not warrant it. We construct an optimal dynamic information disclosure policy called “timely disaster alert,” which promptly warns about the impending crisis. We show that the unique rationalizable strategy for any agent, regardless of his private signal, is to wait for and follow the alert. This eliminates panic. The proposed policy resembles early warning systems used in practice, such as forward-looking stress tests and debt sustainability analysis.
Presentation: (By one of the authors) Peking University, Tsinghua University, Asian Meeting of the Econometric Society (Xiamen), Tsinghua Theory and Finance workshop, North American meeting of the Econometric Society (Seattle), 30th Game Theory meeting (Stony Brook), European meeting of the Econometric Society (Manchester), NYU Shanghai, UPF, Fudan, SMU, NUS, U Kansas, Indiana Kelley, Rochester Simon, UIUC, Utah Eccles, Baruch Zicklin, Ashoka, Michigan State, Stevens, Minnesota-Chicago Accounting Conference