We present a capital regulation policy in a model in which banks can choose to be unregulated, by operating in the shadow banking sector, when the cost of being regulated (restriction on portfolio risk) exceeds the benefit (cheaper funding/insurance). We show that the welfare maximizing capital...

This paper proposes a new channel of inefficient investment crowding of sophisticated investors, and shows how to mitigate the inefficiency through optimal use of aggregate information observed by a regulator. The new channel is that the investors are uncertain about the extent of crowding. We...

How much information can a leader convey to others if she also wants to convince them to follow her? We study a team's decision to take on a risky project, when members' actions exhibit strategic complementarities. We show that the leader must conceal information in any cheap talk equilibrium:...