Mandatory Disclosure and Financial Contagion

Gadi Barlevy and Fernando Alvarez
Additional contact information
Fernando Alvarez: University of Chicago

No 115, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: The paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features "contagion," meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, banks in our model have protable investment projects that require outside funding, but which banks will only undertake if they have enough equity. Investors thus value information about which banks were hit by shocks. We find that when the extent of contagion is large, it is possible for no information to be disclosed in equilibrium but for mandatory disclosure to increase welfare by allowing investment that would not have occurred otherwise. Absent contagion, however, mandatory disclosure will not raise welfare, even if markets are otherwise frozen. Our findings provide insight on when contagion is likely to be a concern, e.g. when banks are highly leveraged against other banks, and thus on when mandatory disclosure is likely to be desirable.

Date: 2014
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2014/paper_115.pdf (application/pdf)

Related works:
Journal Article: Mandatory disclosure and financial contagion (2021)
Working Paper: Mandatory Disclosure and Financial Contagion (2015)
Working Paper: Mandatory Disclosure and Financial Contagion (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:115

Access Statistics for this paper

More papers in 2014 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().