Protecting Savings: Do We Need a Supervision Authority?
AbstractWe apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tiroleâ€™s (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bondsâ€™ risk; a unique benevolent public authority aims at maximising saversâ€™ welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on firmsâ€™ true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. We establish the necessary condition that allows the optimal sanctions to produce the first best equilibrium.
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Bibliographic InfoPaper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 84.
Date of creation: Jul 2005
Date of revision:
Corporate bond; Incentives; Collusion; Regulation.;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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