Optimal Disclosure Regulation for Entrepreneurial Public Financing with Post-Financing Moral Hazard

Abstract

This paper studies optimal disclosure regulation for entrepreneurial public financing with post-financing moral hazard problem. I show that partial disclosure can improve social welfare over full disclosure through reducing efficiency loss caused by the moral hazard problem. As a result, a properly designed partial disclosure rule would be optimal without assuming any disclosure cost. This remains true after allowing for endogenous entrepreneur types with adverse selection concerns. With (constrained) Bayesian persuasion tools, the optimal disclosure rule is fully characterized. Although the paper is developed mainly around entrepreneur equity financing, its intuition can be more generally applicable. For instance, I also adapt the basic model to debt financing and an application to banking system disclosure is provided.