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American Economic Review: Vol. 102 No. 1 (February 2012)


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Optimal Interventions in Markets with Adverse Selection

Article Citation

Philippon, Thomas, and Vasiliki Skreta. 2012. "Optimal Interventions in Markets with Adverse Selection." American Economic Review, 102(1): 1-28.

DOI: 10.1257/aer.102.1.1


We study the design of interventions to stabilize financial markets plagued by adverse selection. Our contribution is to analyze the information revealed by participation decisions. Taking part in a government program carries a stigma, and outside options are mechanism dependent. We show that the efficiency of an intervention can be assessed by its impact on the market interest rate. The presence of an outside market determines the nature of optimal interventions and the choice of financial instruments (debt guarantees in our model), but it does not affect implementation costs. (JEL D82, D86, G01, G20, G31)

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Philippon, Thomas (NYU)
Skreta, Vasiliki (NYU)

JEL Classifications

D82: Asymmetric and Private Information
D86: Economics of Contract: Theory
G01: Financial Crises
G20: Financial Institutions and Services: General
G31: Capital Budgeting; Fixed Investment and Inventory Studies; Capacity

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