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  3. American Economic Review
  4. February 2012
  5. Optimal Interventions in Markets with Adverse Selection

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Optimal Interventions in Markets with Adverse Selection

  • Thomas Philippon
  • Vasiliki Skreta
American Economic Review
vol. 102, no. 1, February 2012
(pp. 1–28)
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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 efficiency 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. (JEL D82, D86, G01, G20, G31)

Citation

Philippon, Thomas, and Vasiliki Skreta. 2012. "Optimal Interventions in Markets with Adverse Selection." American Economic Review, 102 (1): 1–28. DOI: 10.1257/aer.102.1.1

JEL Classification

  • D82 Asymmetric and Private Information
  • D86 Economics of Contract: Theory
  • G01 Financial Crises
  • G20 Financial Institutions and Services: General
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity