Uncertainty as commitment

Jaromir Nosal and Guillermo Ordonez

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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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Uncertainty as commitment (2013)
Working Paper: Uncertainty as Commitment (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:80:y:2016:i:c:p:124-140

DOI: 10.1016/j.jmoneco.2016.06.001

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