Abstract When contracts are unobserved (and nonexclusive), agents can promise the same asset to multiple counterparties and subsequently default. I show that a central mechanism can extract all relevant information about contracts that agents enter by inducing them to report one another. The mechanism sets position limits and reveals the names of agents who hit the limits according to (voluntary) reports from their counterparties. This holds even if sending reports is costly and even if agents can collude. In some cases, an agent’s position limit must be nonbinding in equilibrium. The mechanism has some features of a clearinghouse.

ABSTRACT I develop a model of financial networks in which linkages not only spread contagion, but also induce private sector bailouts, where liquid banks bail out illiquid banks because of the threat of contagion. Introducing this bailout possibility, I show that linkages may be optimal ex ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible. However, in some cases (e.g., when liquidity is concentrated among a small group of banks), the whole network may collapse. I also characterize the optimal network size and apply the results to joint liability arrangements and payment systems.

We study a situation in which a regulator relies on risk models that banks produce in order to regulate them. A bank can generate more than one model and choose which models to reveal to the regulator. The regulator can find out the other models by monitoring the bank, but in equilibrium, monitoring induces the bank to produce less information. We show that a high level of monitoring is desirable when the bank’s private gain from producing more information is either sufficiently high or sufficiently low. When public models are more precise, banks produce more information, but the regulator may end up monitoring more.

ABSTRACT Should regulators reveal the models they use to stress‐test banks? In our setting, revealing leads to gaming, but secrecy can induce banks to underinvest in socially desirable assets for fear of failing the test. We show that although the regulator can solve this underinvestment problem by making the test easier, some disclosure may still be optimal (e.g., if banks have high appetite for risk or if capital shortfalls are not very costly). Cutoff rules are optimal within monotone disclosure rules, but more generally optimal disclosure is single‐peaked. We discuss policy implications and offer applications beyond stress tests.

We study trade between an informed seller and an uninformed buyer who have existing inventories of assets similar to those being traded. We show that these inventories could induce the buyer to increase the price (a run-up) but could also make trade impossible (a freeze) and hamper information dissemination. Competition can amplify the run-up by inducing buyers to purchase assets at a loss to prevent competitors from purchasing at lower prices and releasing bad news about inventories. In a dynamic extension, we show that a market freeze could be preceded by high prices. Finally, we discuss empirical and policy implications.