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Ambiguity, Efficieny and Bank Bailouts

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  • Dmitri V. Vinogradov

    () (University of Heidelberg, Department of Economics)

Abstract

The 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.

Suggested Citation

  • Dmitri V. Vinogradov, 2007. "Ambiguity, Efficieny and Bank Bailouts," Working Papers 0442, University of Heidelberg, Department of Economics, revised May 2007.
  • Handle: RePEc:awi:wpaper:0442
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    File URL: http://www.uni-heidelberg.de/md/awi/forschung/dp442.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    bank bailouts; constructive ambiguity; decision-making; uncertainty;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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