Competition and Welfare Effects of Bailout Policies

Cred Working Paper No 2019–21

33 Pages Posted: 20 Jun 2019

See all articles by Noé Ciet

Noé Ciet

Université Paris 2 Panthéon Assas

Marianne Verdier

Université Paris 2 Panthéon Assas

Date Written: June 12, 2019

Abstract

In this paper, we analyze the welfare effects of bailout policies when banks compete with switching costs. We compare no-bailout policies to systematic bailouts. We argue that no-bailout policies increase the interest rates paid by borrowers ex ante (i.e., before a shock), whereas they may reduce the interest rates paid by consumers who are not credit constrained ex post. Such policies increase social welfare ex post if borrowers can easily switch banks and if the credit constraints are not too severe.

Keywords: Bailout, Bank Failure, Switching Costs, Resolution Policies

JEL Classification: L1, L5, G2

Suggested Citation

Ciet, Noé and Verdier, Marianne, Competition and Welfare Effects of Bailout Policies (June 12, 2019). Cred Working Paper No 2019–21. Available at SSRN: https://ssrn.com/abstract=3402994 or http://dx.doi.org/10.2139/ssrn.3402994

Noé Ciet (Contact Author)

Université Paris 2 Panthéon Assas ( email )

Paris
France

Marianne Verdier

Université Paris 2 Panthéon Assas ( email )

France

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