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Uncertainty as commitment
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DOI：10.1016/j.jmoneco.2016.06.001.png)
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Abstract
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When governments cannot commit to not providing bailouts, banks may take excessive risks and generate crises. At the outbreak of a financial crisis, however, governments are usually uncertain about its systemic nature, and may delay intervention to learn more from endogenous market outcomes. We show such delay introduces strategic restraint: banks restrict their portfolio riskiness relative to their peers to avoid being the worst performers and bearing the costs of delay. Hence, uncertainty has the potential to self-discipline banks and mitigate crises in the absence of commitment. We study the effects of standard regulations on these novel forces. (C) 2016 Elsevier B.V. All rights reserved.
Keywords:
Imperfect information
Commitment
Bailouts
Moral hazard
Time consistency
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