Mandatory disclosure and financial contagion

Fernando Alvarez and Gadi Barlevy

Journal of Economic Theory, 2021, vol. 194, issue C

Abstract: This paper examines whether forcing banks to disclose balance-sheet information that they choose not to reveal can improve welfare. We show mandatory disclosure can improve welfare when banks are vulnerable to contagion due to interconnectedness. In our benchmark model, mandatory disclosure is beneficial only if markets are frozen. When we modify the model to incorporate moral hazard, mandatory disclosure can also improve welfare in normal times, but only as long as there is some potential for contagion. Contagion is essential because it implies banks fail to internalize the benefits of disclosure for others and reveal too little information in equilibrium. Finally, we argue mandatory disclosure may be a substitute to financial reforms rather than a complement, since these reforms mitigate the potential for contagion that makes disclosure beneficial.

Keywords: Information; Networks; Contagion; Disclosure; Stress tests (search for similar items in EconPapers)
JEL-codes: D83 D85 E58 G01 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Mandatory Disclosure and Financial Contagion (2015)
Working Paper: Mandatory Disclosure and Financial Contagion (2014)
Working Paper: Mandatory Disclosure and Financial Contagion (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:194:y:2021:i:c:s0022053121000545

DOI: 10.1016/j.jet.2021.105237

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