Optimal Interventions in Markets with Adverse Selection
Thomas Philippon, Vasiliki Skreta
American Economic Review · 2012 · Volume 102 · Issue 1
Abstract
We study the design of interventions to stabilize financial markets plagued by adverse selection. Our contribution is to analyze the information revealed by participation decisions. Taking part in a government program carries a stigma, and outside options are mechanism dependent. We show that the efficiency of an intervention can be assessed by its impact on the market interest rate. The presence of an outside market determines the nature of optimal interventions and the choice of financial instruments (debt guarantees in our model), but it does not affect implementation costs. (JEL D82, D86, G01, G20, G31)
Keywords
Asymmetric and Private Information, Economics of Contract: Theory, Financial Crises, Financial Institutions and Services: General, Capital Budgeting, Fixed Investment and Inventory Studies, Capacity
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