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Runs versus Lemons: Information Disclosure and Fiscal Capacity

Author

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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    References listed on IDEAS

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    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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