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Runs versus Lemons: Information Disclosure and Fiscal Capacity

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Listed:
  • Thomas Philippon

    (NEW YORK UNIVERSITY)

  • Joseba Martinez

    (New York University)

  • Miguel de Faria e Castro

    (NYU)

Abstract

We argue that, during financial crises, governments are forced to choose between runs and lemons. Revealing information about assets' quality can improve welfare by reducing adverse selection, but it can also create runs on weak banks. A credible fiscal backstop mitigates these risks and allows the government to pursue efficient but risky strategies of high disclosure. Our theory sheds light on optimal interventions and provides an explanation for the different choices that governments make during financial crises.

Suggested Citation

  • Thomas Philippon & Joseba Martinez & Miguel de Faria e Castro, 2015. "Runs versus Lemons: Information Disclosure and Fiscal Capacity," 2015 Meeting Papers 1146, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1146
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    Cited by:

    1. Gabriel Jiménez & José-Luis Peydró & Rafael Repullo & Jesús Saurina, 2017. "Burning Money? Government Lending in a Credit Crunch," Working Papers 984, Barcelona Graduate School of Economics.
    2. Walther, Ansgar & White, Lucy, 2019. "Rules versus Discretion in Bank Resolution," CEPR Discussion Papers 14048, C.E.P.R. Discussion Papers.
    3. Thomas Philippon & Pierre Pessarossi & Boubacar Camara, 2017. "Backtesting European Stress Tests," NBER Working Papers 23083, National Bureau of Economic Research, Inc.
    4. Goldstein, Itay & Leitner, Yaron, 2018. "Stress tests and information disclosure," Journal of Economic Theory, Elsevier, vol. 177(C), pages 34-69.
    5. Leitner, Yaron & Yilmaz, Bilge, 2019. "Regulating a model," Journal of Financial Economics, Elsevier, vol. 131(2), pages 251-268.
    6. Pacicco, Fausto & Vena, Luigi & Venegoni, Andrea, 2020. "Communication and financial supervision: How does disclosure affect market stability?," Journal of Empirical Finance, Elsevier, vol. 57(C), pages 1-15.
    7. Orlov, Dmitry & Zryumov, Pavel & Skrzypacz, Andrzej, 2017. "Design of Macro-prudential Stress Tests," Research Papers 3548, Stanford University, Graduate School of Business.
    8. Alvarez, Fernando & Barlevy, Gadi, 2021. "Mandatory disclosure and financial contagion," Journal of Economic Theory, Elsevier, vol. 194(C).
    9. Georgoutsos, Dimitris & Moratis, George, 2020. "On the informative value of the EU-wide stress tests and the determinants of banks’ stock return reactions," MPRA Paper 62773, University Library of Munich, Germany.
    10. Sara Negrelli, 2018. "Bubbles and Persuasion with Second Order Uncertainty," BAFFI CAREFIN Working Papers 1876, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    11. Negrelli, Sara, 2020. "Bubbles and persuasion with uncertainty over market sentiment," Games and Economic Behavior, Elsevier, vol. 120(C), pages 67-85.
    12. Cecilia Parlatore, 2018. "Designing Stress Scenarios," 2018 Meeting Papers 1090, Society for Economic Dynamics.
    13. Itay Goldstein & Yaron Leitner, 2015. "Stress tests and information disclosure," Working Papers 15-10, Federal Reserve Bank of Philadelphia.
    14. Ryuichiro Izumi, 2021. "Opacity: Insurance and Fragility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 146-169, April.
    15. Gary Gorton & Guillermo Ordoñez, 2020. "Fighting Crises with Secrecy," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(4), pages 218-245, October.
    16. Emanuele Brancati & Marco Macchiavelli, 2015. "The Role of Dispersed Information in Pricing Default: Evidence from the Great Recession," Finance and Economics Discussion Series 2015-79, Board of Governors of the Federal Reserve System (U.S.).
    17. Yaron Leitner & Basil Williams, 2018. "Model Secrecy and Stress Tests," 2018 Meeting Papers 566, Society for Economic Dynamics.
    18. Shapiro, Joel & Zeng, Jing, 2019. "Stress Testing and Bank Lending," CEPR Discussion Papers 13907, C.E.P.R. Discussion Papers.
    19. Michal Kowalik, 2016. "Opacity and Disclosure in Short-Term Wholesale Funding Markets," Supervisory Research and Analysis Working Papers RPA 16-2, Federal Reserve Bank of Boston.
    20. Christian König-Kersting & Stefan T. Trautmann & Razvan Vlahu, 2020. "Bank instability: Interbank linkages and the role of disclosure," DNB Working Papers 665, Netherlands Central Bank, Research Department.
    21. Zhang, Simpson & van der Schaar, Mihaela, 2020. "Reputational dynamics in financial networks during a crisis," Journal of Financial Stability, Elsevier, vol. 49(C).
    22. Carlos Corona & Lin Nan & Gaoqing Zhang, 2019. "The Coordination Role of Stress Tests in Bank Risk‐Taking," Journal of Accounting Research, Wiley Blackwell, vol. 57(5), pages 1161-1200, December.
    23. Vincent Maurin, 2016. "Liquidity Fluctuations in Over the Counter Markets," 2016 Meeting Papers 218, Society for Economic Dynamics.
    24. Glode, Vincent & Opp, Christian C. & Zhang, Xingtan, 2018. "Voluntary disclosure in bilateral transactions," Journal of Economic Theory, Elsevier, vol. 175(C), pages 652-688.

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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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