Inside and outside information
We study an economy with financial frictions in which a regulator designs a test that reveals outside information about a firm's quality to investors. The firm can also disclose verifiable inside information about its quality. We show that the regulator optimally aims for “public speech and pri...
| Main Authors: | , |
|---|---|
| Format: | Journal article |
| Language: | English |
| Published: |
Wiley
2023
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| _version_ | 1811140576860438528 |
|---|---|
| author | Quigley, D Walther, A |
| author_facet | Quigley, D Walther, A |
| author_sort | Quigley, D |
| collection | OXFORD |
| description | We study an economy with financial frictions in which a regulator designs a test that reveals outside information about a firm's quality to investors. The firm can also disclose verifiable inside information about its quality. We show that the regulator optimally aims for “public speech and private silence,” which is achieved with tests that give insiders an incentive to stay quiet. We fully characterize optimal tests by developing tools for Bayesian persuasion with incentive constraints, and use these results to derive novel guidance for the design of bank stress tests, as well as benchmarks for socially optimal corporate credit ratings. |
| first_indexed | 2024-03-07T07:53:37Z |
| format | Journal article |
| id | oxford-uuid:d5d08246-0d0a-463f-90b2-817f1258f54d |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-09-25T04:24:11Z |
| publishDate | 2023 |
| publisher | Wiley |
| record_format | dspace |
| spelling | oxford-uuid:d5d08246-0d0a-463f-90b2-817f1258f54d2024-08-22T11:10:13ZInside and outside informationJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:d5d08246-0d0a-463f-90b2-817f1258f54dEnglishSymplectic ElementsWiley2023Quigley, DWalther, AWe study an economy with financial frictions in which a regulator designs a test that reveals outside information about a firm's quality to investors. The firm can also disclose verifiable inside information about its quality. We show that the regulator optimally aims for “public speech and private silence,” which is achieved with tests that give insiders an incentive to stay quiet. We fully characterize optimal tests by developing tools for Bayesian persuasion with incentive constraints, and use these results to derive novel guidance for the design of bank stress tests, as well as benchmarks for socially optimal corporate credit ratings. |
| spellingShingle | Quigley, D Walther, A Inside and outside information |
| title | Inside and outside information |
| title_full | Inside and outside information |
| title_fullStr | Inside and outside information |
| title_full_unstemmed | Inside and outside information |
| title_short | Inside and outside information |
| title_sort | inside and outside information |
| work_keys_str_mv | AT quigleyd insideandoutsideinformation AT walthera insideandoutsideinformation |