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Optimal Interventions in Markets with Adverse Selection

  • Thomas Philippon
  • Vasiliki Skreta

We study the design of interventions to stabilize financial markets plagued by adverse selection. Our contribution is to analyze the information revealed by participation decisions. Taking part in a government program carries a stigma, and outside options are mechanism dependent. We show that the efficiency of an intervention can be assessed by its impact on the market interest rate. The presence of an outside market determines the nature of optimal interventions and the choice of financial instruments (debt guarantees in our model), but it does not affect implementation costs. (JEL D82, D86, G01, G20, G31)

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File URL: http://web-docs.stern.nyu.edu/old_web/economics/docs/workingpapers/2011/Skreta-OptimalInterventions,%20Apr2011.pdf
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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 11-11.

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Date of creation: 2011
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Handle: RePEc:ste:nystbu:11-11
Contact details of provider: Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/

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