Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning

• Published in: The American economic review Vol. 102; no. 1; pp. 29 - 59
• Main Author: Tirole, Jean
• Format: Journal Article
• Language: English
• 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

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,...