Runs versus lemons: information disclosure and fiscal capacity

Faria-e-Castro, M, Martinez, J and Philippon, T (2017) Runs versus lemons: information disclosure and fiscal capacity. The Review of Economic Studies, 84 (4). pp. 1683-1707. ISSN 0034-6527 OPEN ACCESS

Abstract

We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model, governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.

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Item Type: Article
Subject Areas: Economics
Date Deposited: 04 Feb 2019 11:29
Last Modified: 16 Sep 2019 11:09
URI: http://lbsresearch.london.edu/id/eprint/1072
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