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- Title
Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning.
- Authors
Tirole, Jean
- Abstract
The paper provides a first analysis of market jump starting 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. (JEL D82, D83, G01, G31, H81)
- Subjects
ADVERSE selection (Commerce); DEFAULT (Finance); RISK assessment; FINANCIAL market reaction; FINANCIAL markets -- Government policy; DOMESTIC economic assistance; FINANCIAL bailouts; INTERVENTION (Federal government); ECONOMIC policy
- Publication
American Economic Review, 2012, Vol 102, Issue 1, p29
- ISSN
0002-8282
- Publication type
Article
- DOI
10.1257/aer.102.1.29