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Coordination failure among multiple lenders and the role and effects of public policy

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  • Kasahara, Tetsuya
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    Abstract

    This paper analyzes the role and effects of public policy when inefficient financing can result from coordination problems among multiple lenders. Developing a financing game with both fundamental and strategic uncertainty, we first show that inefficient liquidation of a fundamentally solvent project can arise in equilibrium as a result of coordination failure among lenders. We then investigate the effects of two types of public policies: an information policy and a public guarantee program. The analysis shows that the inefficiencies caused by coordination problems among lenders can be effectively and efficiently removed only when both policies are simultaneously designed and implemented in an appropriate combination. We also address the potential cost of public intervention, focusing particularly on the negative influence on the ex ante effort incentives of borrowers.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 5 (2009)
    Issue (Month): 2 (June)
    Pages: 183-198

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    Handle: RePEc:eee:finsta:v:5:y:2009:i:2:p:183-198

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    Web page: http://www.elsevier.com/locate/jfstabil

    Related research

    Keywords: Coordination problems Strategic complementarities Information precision Public guarantee policy;

    References

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    1. Rochet, Jean-Charles & Vives, Xavier, 2004. "Coordination Failures and the Lender of Last Resort : Was Bagehot Right After All?," IDEI Working Papers 294, Institut d'Économie Industrielle (IDEI), Toulouse.
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    15. Chui, Michael & Gai, Prasanna & Haldane, Andrew G., 2002. "Sovereign liquidity crises: Analytics and implications for public policy," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 519-546, March.
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    Cited by:
    1. Busetta, Giovanni & Zazzaro, Alberto, 2012. "Mutual loan-guarantee societies in monopolistic credit markets with adverse selection," Journal of Financial Stability, Elsevier, vol. 8(1), pages 15-24.
    2. Hallak, Issam, 2013. "Private sector share of external debt and financial stability: Evidence from bank loans," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 17-41.
    3. König, Philipp & Anand, Kartik & Heinemann, Frank, 2013. "The ‘Celtic Crisis’: Guarantees, transparency, and systemic liquidity risk," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79747, Verein für Socialpolitik / German Economic Association.

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