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

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Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts

Article Citation

Farhi, Emmanuel, and Jean Tirole. 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts." American Economic Review, 102(1): 60-93.

DOI: 10.1257/aer.102.1.60

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. (JEL D82, E52, E58, G01, G21, G28)

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Authors

Farhi, Emmanuel (Harvard U)
Tirole, Jean (Toulouse School of Economics)

JEL Classifications

D82: Asymmetric and Private Information
E52: Monetary Policy
E58: Central Banks and Their Policies
G01: Financial Crises
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28: Financial Institutions and Services: Government Policy and Regulation


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