Ambiguity, Efficieny and Bank Bailouts
AbstractThe paper examines the effects of ambiguity in regulation on the equilibrium allocation. Under ambiguous bailout policy, agents’ suffer from a lack of information with regards to the insolvency resolution method, which would be chosen by the regulator if a financial institution fails. In this case, beliefs of bankers regarding whether an insolvent bank is liquidated, may differ from those of depositors. The beliefs may be asymmetric even if bankers and depositors possess absolutely symmetric information about the policy of the regulator. It is shown that such asymmetry in beliefs can generate an allocative inefficiency of the bank based economy.
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Bibliographic InfoPaper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0442.
Length: 29 pages
Date of creation: May 2007
Date of revision: May 2007
bank bailouts; constructive ambiguity; decision-making; uncertainty;
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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