Protecting Savings: Do We Need a Supervision Authority?

Francesco Giuli and Marco Manzo

No 84, Working Papers from Sapienza University of Rome, Department of Public Economics

Abstract: We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole’s (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bonds’ risk; a unique benevolent public authority aims at maximising savers’ welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on firms’ true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. We establish the necessary condition that allows the optimal sanctions to produce the first best equilibrium.

Keywords: Corporate bond; Incentives; Collusion; Regulation (search for similar items in EconPapers)
JEL-codes: D82 G28 (search for similar items in EconPapers)
Date: 2005-08
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