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Markets with Multidimensional Private Information

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  • Robert Shimer

    (University of Chicago)

  • Veronica Guerrieri

    (University of Chicago)

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    Abstract

    This paper explores the tension between risk sharing and risk taking linked to securitization. Financial development typically leads to an increase in securitization that helps financial institutions to share idyiosincratic risk. By increasing expected returns, risk sharing tends to reduce the incentive to pay monitoring costs and spurs a wave of easy lending. This generates an increase in credit access, but at the same time makes financial institutions more exposed to risk. As a result, small aggregate shocks may generate large financial crises.

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    File URL: http://www.economicdynamics.org/meetpapers/2012/paper_1192.pdf
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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1192.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:1192

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    Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    Cited by:
    1. Cheremukhin, Anton A. & Tutino, Antonella & Restrepo-Echavarria, Paulina, 2014. "A theory of targeted search," Working Papers 1402, Federal Reserve Bank of Dallas.

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