Uncertainty as Commitment

Abstract

Time-inconsistency of no-bailout policies can create incentives for banks to take excessive risks and generate endogenous crises when the government cannot commit. However, at the outbreak of financial problems, usually the government is uncertain about their nature, and hence it may delay intervention to learn more about them. We show that intervention delay leads to strategic restraint: banks endogenously restrict the riskiness of their portfolio relative to their peers in order to avoid being the worst performers and bearing the cost of such delay.These novel forces help to avoid endogenous crises even when the government cannot commit. We analyze the effect of government policies from the perspective of this new result.

Fiscal Rules, Bailouts, and Reputation in Federal Governments

“…Uncertainty about the type of the central government plays a key role in the provision of incentives to local governments. Nosal and Ordoñez (2016) also consider an environment in which uncertainty can mitigate the time inconsistency problem when a central government cannot commit not to bail out banks. The mechanism is very different: here uncertainty about the type of the central government curbs debt issuances by the local governments, while in their paper it is the uncertainty about the state of the economy that restrains the central government from not intervening ex-post.…”

Does size matter? Bailouts with large and small banks

“…Related Literature This paper is most closely related to the growing literature that studies the implications of bank bailouts, and other system-wide government interventions in financial crises. The core idea underlying both earlier and most recent contributions, including those of Holmstrom and Tirole (1998), Freixas (1999), Schneider and Tornell (2004), Acharya and Yorulmazer (2007), Diamond and Rajan (2012), Farhi and Tirole (2012), Bianchi (2016), Keister (2016), Nosal and Ordoñez (2016), Chari and Kehoe (2016), Bianchi and Mendoza (2017), and Gourinchas and Martin (2017) is that the lack of government's commitment regarding ex-post optimal policies modifies the ex-ante behavior of banks, a phenomenon that is often described as moral hazard.…”

Bailouts and Financial Fragility

“…In addition to the papers discussed in this section, recent contributions include Niepmann and Schmidt-Eisenlohr (2013), who examine the strategic interaction between governments when bailouts have international spillover effects, Ranciere and Tornell (2015), who show how the anticipation of a bailout can lead to welfare-reducing financial innovation, and Nosal and Ordoñez (2013), who study how uncertainty about the government's information set can mitigate the moral hazard associated with bailouts. outcomes are realized, however, a benevolent policy maker would prefer to avoid these costs by bailing out any firm facing bankruptcy.…”