A shadow unregulated banking system flourished during the first decade of the century and suddenly collapsed in less than a year. It is widely accepted this shadow system was based on confidence, but it is not clear how confidence can spur so much and then disappear so fast. In this paper I argue confidence is sustained by the recognition that financial agents care about reputation. While reputation incentives generate an alternative cheaper than traditional banking to provide financing needs, it is also a fragile alternative, that may suddenly collapse. This implies financial regulation should be counter-cyclical, but not imposing more costs to traditional banking during good times but inducing more benefits to better firms during bad times.
|Date of creation:||2010|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Guillermo L. Ordoñez, 2009.
"Fragility of reputation and clustering of risk-taking,"
431, Federal Reserve Bank of Minneapolis.
- Ordoñez, Guillermo L., 2013. "Fragility of reputation and clustering of risk-taking," Theoretical Economics, Econometric Society, vol. 8(3), September.
- Guillermo Ordonez, 2008. "Fragility of Reputation and Clustering in Risk Taking," 2008 Meeting Papers 441, Society for Economic Dynamics.
- Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, December.
When requesting a correction, please mention this item's handle: RePEc:red:sed010:310. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.