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Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning

Author

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  • Jean Tirole

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

The paper provides a first analysis of market jumpstarting 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.

Suggested Citation

  • Jean Tirole, 2012. "Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning," Post-Print hal-04886042, HAL.
    • Handle: RePEc:hal:journl:hal-04886042
    DOI: 10.1257/aer.102.1.29
    Note: View the original document on HAL open archive server: https://hal.science/hal-04886042v1
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    References listed on IDEAS

    as
    1. Haile, Philip A., 2003. "Auctions with private uncertainty and resale opportunities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 72-110, January.
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