Overcoming adverse selection: How public intervention can restore market functioning

Jean Tirole*

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

74 Scopus citations

Abstract

The paper provides a first analysis of market jump starting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy assets to the market. The government reduces adverse selection enough to let the market rebound, but not too much, so as to limit the cost of intervention. The existence of a market imposes no welfare cost.

Original languageEnglish (US)
Pages (from-to)29-59
Number of pages31
JournalAmerican Economic Review
Volume102
Issue number1
DOIs
StatePublished - Feb 2012

ASJC Scopus subject areas

  • Economics and Econometrics

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