Optimal Interventions in Markets with Adverse Selection

30 Pages Posted: 1 Mar 2010 Last revised: 20 Aug 2021

See all articles by Thomas Philippon

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Vasiliki Skreta

University of Texas at Austin - Department of Economics; University College London

Multiple version iconThere are 3 versions of this paper

Date Written: February 2010

Abstract

We characterize cost-minimizing interventions to restore lending and investment when markets fail due to adverse selection. We solve a mechanism design problem where the strategic decision to participate in a government's program signals information that affects the financing terms of non-participating borrowers. In this environment, we find that the government cannot selectively attract good borrowers, that the efficiency of an intervention is fully determined by the market rate for non-participating borrowers, and that simple programs of debt guarantee are optimal, while equity injections or asset purchases are not. Finally, the government does not benefit from shutting down private markets.

Suggested Citation

Philippon, Thomas and Skreta, Vasiliki, Optimal Interventions in Markets with Adverse Selection (February 2010). Available at SSRN: https://ssrn.com/abstract=1560920

Thomas Philippon (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Vasiliki Skreta

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

HOME PAGE: http://vskreta.wixsite.com/vskreta

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

HOME PAGE: http://vskreta.wixsite.com/vskreta

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