Bailouts, Endogenous Financial Regimes, and Market Sentiments

Ngo Van Long and Huilan Tian

Review of International Economics, 2002, vol. 10, issue 1, 2-15

Abstract: The authors examine the role of strategic interactions among a small number of financial intermediaries who know that the current financial regime is subject to change. The current financial regime offers protection to the intermediaries against bad outcomes. Each financial intermediary’s investment strategy is shown to depend on its rivals’ strategies. It is shown that a small shock that causes an initially small deviation from an intermediary’s equilibrium strategy can lead to a series of larger deviations by its rivals, thereby precipitating a change of financial regime.

Date: 2002
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