State-Promoted Investment for Industrial Reforms: an Information Design Approach

TL;DR

This paper models how governments can optimally disclose information to promote large-scale investments under uncertainty, balancing spillover effects and market development influences.

Contribution

It introduces a novel information design framework for government investment promotion, analyzing optimal disclosure policies in a multi-project setting.

Findings

Full disclosure occurs only when project success probability is high.

Multiple projects lead to prioritizing those with larger spillover effects.

Financial market development influences the government's disclosure strategy.

Abstract

We analyze the optimal strategy for a government to promote large-scale investment projects under information frictions. Specifically, we propose a model where the government collects information on probability of each investment and discloses it to private investors a la Kamenica and Gentzkow (2011). We derive the government's optimal information policy, which is characterized as threshold values for the unknown probability of the projects released to the private investors, and study how the underlying features of the economy affect the optimal policies. We find that when multiple projects are available, the government promotes the project with a bigger spillover effect by fully revealing the true state of the economy only when its probability is substantially high. Moreover, the development of the financial/information market also affects the optimal rule.