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Uncertainty as commitment

Jaromir Nosal and Guillermo Ordoñez

Journal of Monetary Economics, 2016, vol. 80, issue C, 124-140

Abstract: When governments cannot commit to not providing bailouts, banks may take excessive risks and generate crises. At the outbreak of a financial crisis, however, governments are usually uncertain about its systemic nature, and may delay intervention to learn more from endogenous market outcomes. We show such delay introduces strategic restraint: banks restrict their portfolio riskiness relative to their peers to avoid being the worst performers and bearing the costs of delay. Hence, uncertainty has the potential to self-discipline banks and mitigate crises in the absence of commitment. We study the effects of standard regulations on these novel forces.

Keywords: Imperfect information; Commitment; Bailouts; Moral hazard; Time consistency (search for similar items in EconPapers)
Date: 2016
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Working Paper: Uncertainty as commitment (2013) Downloads
Working Paper: Uncertainty as Commitment (2013) Downloads
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