Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/123819
Authors: 
Keister, Todd
Year of Publication: 
2014
Series/Report no.: 
Working Papers, Department of Economics, Rutgers, The State University of New Jersey 2014-01
Abstract: 
Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond by using public resources to augment the private consumption of those investors facing losses. The anticipation of such a "bailout" distorts ex ante incentives, leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility. Prohibiting bailouts is not necessarily desirable, however: while it induces intermediaries to become more liquid, it may nevertheless lower welfare and leave the economy more susceptible to a crisis. A policy of taxing short-term liabilities, in contrast, can both improve the allocation of resources and promote financial stability.
Subjects: 
bank runs
bailouts
moral hazard
financial regulation
JEL: 
G28
Document Type: 
Working Paper

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