Revise and Resubmit at American Economic Review
In a regime change game, agents sequentially decide whether to attack or not, without observing the past actions by others. To dissuade them from attacking, a principal adopts a dynamic information disclosure policy - repeated viability tests. A viability test publicly discloses whether the regime has survived the attacks so far. When such tests are sufficiently frequent, in the unique cutoff equilibrium, regardless of their private signals, agents never attack if the regime passes the latest test. We apply our theory to show that by sufficiently diffusing the rollover choices across different maturity dates, a borrower can eliminate panic-based runs.
This paper embeds panic-based runs in financial markets into the analysis of the fragility of financial networks. Panics can be contagious when banks are interconnected. During normal times, when no bank falls into distress before its creditors make their withdrawal decisions, I find a novel mechanism to show that financial networks with weaker connections (corresponding to a more diversified pattern of interbank liabilities) will trigger more panics and, in that sense, be more fragile. When one bank in the network receives a shock that is large enough to make it insolvent, creditors may be uncertain about the financial linkages between their bank and the initial distressed bank. In such a situation, when a crisis is underway, I show that information disclosure is likely to trigger more panics from the initial distressed bank and facilitate financial contagion. In this context, less diversified networks are more sensitive to creditors' information and beliefs about the location of the initial distressed bank, and could be more fragile. I find that, in core periphery networks, core banks with higher exposures and more counterparties will face more panics from their creditors. Moreover, the financial system becomes more fragile when core banks intermediate more loans with periphery banks.
"The Impact of Asymmetric Information on Debt Maturity Structure" with Xu Wei and Ho-Mou Wu
We build a simple model to study the optimal debt maturity choice with asymmetric information. Our model features an optimal mixture of short-term and long-term debts, which balances the cost of premature liquidation and the benefit from more favorable refinancing terms because of the new information becoming available at the rollover date. The information friction rationalizes the empirically documented hump-shaped relation between the amount of short-term borrowing and the borrowers' asset quality, which enables us to explain the over-reliance on short-term financing before the Great Recession and the reversal afterwards. Policies such as compulsory information disclosure and ex post liquidity injection may provide ex ante incentives for short-term financing, and thus exacerbate the maturity mismatch and the liquidation risk.
Research in Progress:
"Timely Persuasion" (draft coming soon) with Deepal Basak (ISB)
"Delay and Learning in Efficient Coordination: Theory and Experiment" with Wendy Jin (NYU Shanghai)