Bailouts and financial fragility

Arbeitspapier

Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond by using public resources to augment the private consumption of those investors facing losses. The anticipation of such a "bailout" distorts ex ante incentives, leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility. Prohibiting bailouts is not necessarily desirable, however: while it induces intermediaries to become more liquid, it may nevertheless lower welfare and leave the economy more susceptible to a crisis. A policy of taxing short-term liabilities, in contrast, can both improve the allocation of resources and promote financial stability.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2014-01

Classification and Topics

• Classification: Wirtschaft ; Financial Institutions and Services: Government Policy and Regulation
• Subject: bank runs ; bailouts ; moral hazard ; financial regulation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Keister, Todd
• Event: Veröffentlichung
• (who): Rutgers University, Department of Economics
• (where): New Brunswick, NJ
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/123819
• Last update: 10.03.2025, 11:46 AM CET