American Economic Review Vol. 102 No. 1 2012

Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts

Emmanuel Farhi¹; Jean Tirole²

¹ Harvard University, Department of Economics, Littauer 318, 1875 Cambridge Street, Cambridge, MA 02138, and Toulouse School of Economics. · ² Toulouse School of Economics, Manufacture des Tabacs, 21 allees de Brienne, F-31000 Toulouse.

Abstract

The article shows that time-consistent, imperfectly targeted support to distressed institutions makes private leverage choices strategic complements. When everyone engages in maturity mismatch, authorities have little choice but intervening, creating both current and deferred (sowing the seeds of the next crisis) social costs. In turn, it is profitable to adopt a risky balance sheet. These insights have important consequences, from banks choosing to correlate their risk exposures to the need for macro-prudential supervision.

DOI

10.1257/aer.102.1.60

Volume

102

Issue

1

Pages

60-93

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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