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Runs versus Lemons: Information Disclosure and Fiscal Capacity

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  • Miguel Faria-e-Castro
  • Joseba Martinez
  • Thomas Philippon

Abstract

We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model, governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.

Suggested Citation

  • Miguel Faria-e-Castro & Joseba Martinez & Thomas Philippon, 2017. "Runs versus Lemons: Information Disclosure and Fiscal Capacity," Review of Economic Studies, Oxford University Press, vol. 84(4), pages 1683-1707.
  • Handle: RePEc:oup:restud:v:84:y:2017:i:4:p:1683-1707.
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    File URL: http://hdl.handle.net/10.1093/restud/rdw060
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    Citations

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    Cited by:

    1. Alvarez, Fernando & Barlevy, Gadi, 2014. "Mandatory Disclosure and Financial Contagion," Working Paper Series WP-2014-4, Federal Reserve Bank of Chicago.
    2. Thomas Philippon & Pierre Pessarossi & Boubacar Camara, 2017. "Backtesting European Stress Tests," NBER Working Papers 23083, National Bureau of Economic Research, Inc.
    3. Vincent Maurin, 2016. "Liquidity Fluctuations in Over the Counter Markets," 2016 Meeting Papers 218, Society for Economic Dynamics.
    4. Goldstein, Itay & Leitner, Yaron, 2015. "Stress tests and information disclosure," Working Papers 15-10, Federal Reserve Bank of Philadelphia, revised 16 Nov 2015.
    5. Kowalik, Michal, 2016. "Opacity and Disclosure in Short-Term Wholesale Funding Markets," Risk and Policy Analysis Unit Working Paper RPA 16-2, Federal Reserve Bank of Boston.
    6. repec:eee:jetheo:v:175:y:2018:i:c:p:652-688 is not listed on IDEAS

    More about this item

    Keywords

    Stress test; Bayesian persuasion; Fiscal capacity; Bailouts;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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