Bailouts and Financial Fragility

Todd Keister

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond by using public resources to augment the private consumption of those investors facing losses. The anticipation of such a “bailout” distorts ex ante incentives, leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility. Prohibiting bailouts is not necessarily desirable, however: while it induces intermediaries to become more liquid, it may nevertheless lower welfare and leave the economy more susceptible to a crisis. A policy of taxing short-term liabilities, in contrast, can both improve the allocation of resources and promote financial stability.

Keywords: bank runs; bailouts; moral hazard; financial regulation (search for similar items in EconPapers)
JEL-codes: G28 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2014-01-29
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Downloads: (external link)
http://www.sas.rutgers.edu/virtual/snde/wp/2014-01.pdf (application/pdf)

Related works:
Journal Article: Bailouts and Financial Fragility (2016)
Working Paper: Bailouts and financial fragility (2010)
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:rut:rutres:201401

Access Statistics for this paper

More papers in Departmental Working Papers from Rutgers University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().