Optimal Interventions in Markets with Adverse Selection

Thomas Philippon () and Vasiliki Skreta

No 7737, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study interventions to restore efficient lending and investment when financial markets fail because of adverse selection. We solve a design problem where the decision to participate in a program offered by the government can be a signal for private information. We charac terize optimal mechanisms and analyze specific programs often used during banking crises. We show that programs attracting all banks dominate those attracting only troubled banks, and that simple guarantees for new debt issuances implement the optimal mechanism, while equity injections and asset buyback do not. We also discuss the consequences of moral hazard.

Keywords: Adverse selection; Bailout; Financial crisis; Information; Mechanism design (search for similar items in EconPapers)
JEL-codes: D02 D62 D82 D86 E44 E58 G01 G2 (search for similar items in EconPapers)
Date: 2010-03
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Optimal Interventions in Markets with Adverse Selection (2012)
Working Paper: Optimal Interventions in Markets with Adverse Selection (2011)
Working Paper: Optimal Interventions in Markets with Adverse Selection (2010)
Working Paper: Optimal Interventions in Markets with Adverse Selection (2010)
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