Optimal Interventions in Markets with Adverse Selection

34 Pages Posted: 6 Dec 2010  

Thomas Philippon

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

Vasiliki Skreta

University College London

Multiple version iconThere are 3 versions of this paper

Date Written: September 2011

Abstract

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 effciency 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.

Keywords: adverse selection, market collapse, mechanism design, mechanism-dependent participation

Suggested Citation

Philippon, Thomas and Skreta, Vasiliki, Optimal Interventions in Markets with Adverse Selection (September 2011). NYU Working Paper No. 2451/30283. Available at SSRN: https://ssrn.com/abstract=1718941

Thomas Philippon (Contact Author)

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

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vasiliki Skreta

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

HOME PAGE: http://https://sites.google.com/site/vskreta/‎

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