Optimal Interventions in Markets with Adverse Selection / Thomas Philippon, Vasiliki Skreta.

Format:

Book

Author/Creator:

Philippon, Thomas.

Contributor:

National Bureau of Economic Research.

Skreta, Vasiliki.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15785.

NBER working paper series no. w15785

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

We characterize cost-minimizing interventions to restore lending and investment when markets fail due to adverse selection. We solve a mechanism design problem where the strategic decision to participate in a government's program signals information that affects the financing terms of non-participating borrowers. In this environment, we find that the government cannot selectively attract good borrowers, that the efficiency of an intervention is fully determined by the market rate for non-participating borrowers, and that simple programs of debt guarantee are optimal, while equity injections or asset purchases are not. Finally, the government does not benefit from shutting down private markets.

Notes:

Print version record

February 2010.