Work

Optimal Interventions in Markets with Adverse Selection

Year: 2010

Type: report

Abstract: We characterize cost-minimizing interventions to restore lending and investment when markets fail due to adverse selection.We solve a mechanism design problem where the strategic decision to participate in a government's program signals information that affects the financing terms of non-participating borrowers.In this environment, we find that the government cannot selectively attract good borrowers, that the efficiency of an intervention is fully determined by the market rate for non-participating borrowers, and that simple programs of debt guarantee are optimal, while equity injections or asset purchases are not.Finally, the government does not benefit from shutting down private markets.

Source: National Bureau of Economic Research

DOI: 10.3386/w15785

Authors: Thomas Philippon, Vasiliki Skreta

Institutions: National Bureau of Economic Research, University of California, Los Angeles, New York University, Athens University of Economics and Business, London School of Economics and Political Science, University of California, Berkeley, Stanford University

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: No poverty

Open Access status: green

OpenAlex ID: W2120069930

Cites: 57

Cited by: 85

Related to: 10