Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning

Tirole, Jean (2012) Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning. American Economic Review (AER), 102. pp. 29-59.

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Official URL: http://tse-fr.eu/pub/24009

Abstract

The paper provides a first analysis of market jumpstarting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy assets to the market. The government reduces adverse selection enough to let the market rebound, but not too much, so as to limit the cost of intervention. The existence of a market imposes no welfare cost.

Item Type: Article
Language: English
Date: February 2012
Refereed: Yes
Uncontrolled Keywords: market freeze, market rebound, asset repurchases, recapitalization, mechanism design, mechanism-dependent participation constraint
JEL codes: H81 - Governmental Loans, Loan Guarantees, and Credits
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:18
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:24009
URI: http://publications.ut-capitole.fr/id/eprint/15108

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