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Review of Economic Studies Vol. 84 No. 4 2016

Runs versus Lemons: Information Disclosure and Fiscal Capacity

Miguel Faria-e-Castro1,2; Joseba Martinez1,3; Thomas Philippon4,5,1

1 New York University · 2 Federal Reserve Bank of St. Louis · 3 London Business School · 4 Center for Economic and Policy Research · 5 National Bureau of Economic Research

open access

Abstract

We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the risk of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.

DOI
10.1093/restud/rdw060
Volume
84
Issue
4
Pages
rdw060
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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