Runs versus Lemons: Information Disclosure and Fiscal Capacity

Miguel Faria-e-Castro, Joseba Martinez and Thomas Philippon ()

The Review of Economic Studies, 2017, vol. 84, issue 4, 1683-1707

Abstract: We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model, governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.

Keywords: Stress test; Bayesian persuasion; Fiscal capacity; Bailouts (search for similar items in EconPapers)
JEL-codes: E58 E62 G18 G28 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Related works:
Working Paper: Runs versus Lemons: Information Disclosure and Fiscal Capacity (2016)
Working Paper: Runs versus Lemons: Information Disclosure and Fiscal Capacity (2015)
Working Paper: Runs versus Lemons: Information Disclosure and Fiscal Capacity (2015)
Working Paper: Runs versus Lemons: Information Disclosure and Fiscal Capacity (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:84:y:2017:i:4:p:1683-1707.

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