Confusion as Commitment
In this paper, we argue that government confusion about the nature of the shock to the economy when observing banks in distress has the potential to relax the time inconsistency of policymakers and the ensuing collective moral hazard that leads to endogenous systemic events. Government confusion lowers the expected benefit from intervention and may lead to a delay, for the purpose of learning more about the nature of the shock. This hinders strategic coordination and leads to what we call strategic restraint, as banks endogenously restrict the riskiness of their portfolio in relative to their peers in order to avoid being the worst performers. From the perspective of these novel forces, we analyze the optimality of government intervention and regulation.
|Date of creation:||2012|
|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
When requesting a correction, please mention this item's handle: RePEc:red:sed012:1026. 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.