Runs versus Lemons: Information Disclosure and Fiscal Capacity

70 Pages Posted: 25 Jul 2016

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: July 2016

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.

JEL Classification: E5, E6, G1, G2

Suggested Citation

Faria-e-Castro, Miguel and Martinez, Joseba and Philippon, Thomas, Runs versus Lemons: Information Disclosure and Fiscal Capacity (July 2016). CEPR Discussion Paper No. DP11408, Available at SSRN: https://ssrn.com/abstract=2814083

Miguel Faria-e-Castro (Contact Author)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Joseba Martinez

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Thomas Philippon

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

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