Contagion, bailouts and welfare impacts of Systemic Risk

Christoph Siebenbrunner

No 2604313, Proceedings of International Academic Conferences from International Institute of Social and Economic Sciences

Abstract: The aim of the paper is to study whether a private-sector bailout can emerge endogenously, when agents act rationally in the absence of a government intervention. I study a contagion model in which may prevent default cascades by bailing out defaulted. Using this model, I derive the conditions for social efficiency and individual rationality of bailouts. Bailouts are almost always socially efficient but hardly ever individually rational because of an interesting feature of contagion effects. There exists a solution that is both individually rational and socially efficient. However, it does not constitute a non-cooperative equilibrium. I conclude that a policy intervention in which are forced to contribute an amount proportional to the contagion losses received towards a bailout can provide a solution to this dilemma.

Keywords: Systemic Risk; Financial Stability; Financial regulation (search for similar items in EconPapers)
JEL-codes: G00 G01 G18 (search for similar items in EconPapers)
Pages: 1 page
Date: 2015-07
New Economics Papers: this item is included in nep-ban and nep-cba
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Published in Proceedings of the Proceedings of the 17th International Academic Conference, Vienna, Jul 2015, pages 419-419

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Persistent link: https://EconPapers.repec.org/RePEc:sek:iacpro:2604313

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