Protecting Savings: Do We Need a Supervision Authority?

30 Pages Posted: 9 Nov 2008 Last revised: 8 Mar 2010

See all articles by Francesco Giuli

Francesco Giuli

University of Rome III - Department of Economics

Marco Manzo

Ministry of Economy and Finance, Italy

Date Written: November 6, 2008

Abstract

We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole's (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bonds' risk; a unique benevolent public authority aims at maximising savers' welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on firms' true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. We establish the necessary condition that allows the optimal sanctions to produce the first best equilibrium.

Keywords: Corporate bond, Incentives, Collusion, Regulation

JEL Classification: D82, G28

Suggested Citation

Giuli, Francesco and Manzo, Marco, Protecting Savings: Do We Need a Supervision Authority? (November 6, 2008). Available at SSRN: https://ssrn.com/abstract=1296461 or http://dx.doi.org/10.2139/ssrn.1296461

Francesco Giuli (Contact Author)

University of Rome III - Department of Economics ( email )

via Ostiense, 139
Rome, 00154
Italy

Marco Manzo

Ministry of Economy and Finance, Italy ( email )

Rome
Italy

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