Uncertainty as Commitment

48 Pages Posted: 2 Feb 2013

See all articles by Jaromir B. Nosal

Jaromir B. Nosal

Columbia Business School - Economics Department

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: February 2013

Abstract

Time-inconsistency of no-bailout policies can create incentives for banks to take excessive risks and generate endogenous crises when the government cannot commit. However, at the outbreak of financial problems, usually the government is uncertain about their nature, and hence it may delay intervention to learn more about them. We show that intervention delay leads to strategic restraint banks endogenously restrict the riskiness of their portfolio relative to their peers in order to avoid being the worst performers and bearing the cost of such delay. These novel forces help to avoid endogenous crises even when the government cannot commit. We analyze the effect of government policies from the perspective of this new result.

Suggested Citation

Nosal, Jaromir B. and Ordoñez, Guillermo, Uncertainty as Commitment (February 2013). NBER Working Paper No. w18766, Available at SSRN: https://ssrn.com/abstract=2210785

Jaromir B. Nosal (Contact Author)

Columbia Business School - Economics Department ( email )

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Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

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