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Mandatory disclosure and financial contagion

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  • Alvarez, Fernando
  • Barlevy, Gadi

Abstract

This paper examines whether forcing banks to disclose balance-sheet information that they choose not to reveal can improve welfare. We show mandatory disclosure can improve welfare when banks are vulnerable to contagion due to interconnectedness. In our benchmark model, mandatory disclosure is beneficial only if markets are frozen. When we modify the model to incorporate moral hazard, mandatory disclosure can also improve welfare in normal times, but only as long as there is some potential for contagion. Contagion is essential because it implies banks fail to internalize the benefits of disclosure for others and reveal too little information in equilibrium. Finally, we argue mandatory disclosure may be a substitute to financial reforms rather than a complement, since these reforms mitigate the potential for contagion that makes disclosure beneficial.

Suggested Citation

  • Alvarez, Fernando & Barlevy, Gadi, 2021. "Mandatory disclosure and financial contagion," Journal of Economic Theory, Elsevier, vol. 194(C).
  • Handle: RePEc:eee:jetheo:v:194:y:2021:i:c:s0022053121000545
    DOI: 10.1016/j.jet.2021.105237
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    More about this item

    Keywords

    Information; Networks; Contagion; Disclosure; Stress tests;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises

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