Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning

The paper provides a first analysis of market jump starting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections,...

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Bibliographic Details
Published inThe American economic review Vol. 102; no. 1; pp. 29 - 59
Main Author Tirole, Jean
Format Journal Article
LanguageEnglish
Published Nashville American Economic Association 01.02.2012
Subjects
Adverse selection
Allocative efficiency
Bank assets
Economic models
Economic policy
Economic theory
Equilibrium
Equity
Equity stake
Finance
Financial investments
Government
Government intervention
Intervention
Laissez faire
Legacies
Market
Market equilibrium
Market prices
Participation
Securities markets
Stabilization policy
Studies
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Summary:The paper provides a first analysis of market jump starting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy assets to the market. The government reduces adverse selection enough to let the market rebound, but not too much, so as to limit the cost of intervention. The existence of a market imposes no welfare cost.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.102.1.29