Uncertainty as Commitment / Jaromir Nosal, Guillermo Ordoñez.

Format:

Book

Author/Creator:

Nosal, Jaromir.

Contributor:

National Bureau of Economic Research.

Ordoñez, Guillermo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18766.

NBER working paper series no. w18766

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

Time-inconsistency of no-bailout policies can create incentives for banks to take excessive risks and generate endogenous crises when the government cannot commit. However, at the outbreak of financial problems, usually the government is uncertain about their nature, and hence it may delay intervention to learn more about them. We show that intervention delay leads to strategic restraint banks endogenously restrict the riskiness of their portfolio relative to their peers in order to avoid being the worst performers and bearing the cost of such delay. These novel forces help to avoid endogenous crises even when the government cannot commit. We analyze the effect of government policies from the perspective of this new result.

Notes:

Print version record

February 2013.