Runs Versus Lemons: Information Disclosure and Fiscal Capacity

68 Pages Posted: 26 May 2015

See all articles by Miguel Faria-e-Castro

Miguel Faria-e-Castro

Federal Reserve Bank of St. Louis

Joseba Martinez

London Business School - Department of Economics

Thomas Philippon

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

Multiple version iconThere are 3 versions of this paper

Date Written: May 2015

Abstract

We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the risk of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.

Suggested Citation

Faria-e-Castro, Miguel and Martinez, Joseba and Philippon, Thomas, Runs Versus Lemons: Information Disclosure and Fiscal Capacity (May 2015). NBER Working Paper No. w21201, Available at SSRN: https://ssrn.com/abstract=2610498

Miguel Faria-e-Castro (Contact Author)

Federal Reserve Bank of St. Louis ( email )

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Saint Louis, MO 63011
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Joseba Martinez

London Business School - Department of Economics ( email )

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London NW1 4SA
United Kingdom

Thomas Philippon

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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