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Protecting Savings: Do We Need a Supervision Authority?

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  • Francesco Giuli
  • Marco Manzo

Abstract

We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole’s (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bonds’ risk; a unique benevolent public authority aims at maximising savers’ welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on firms’ true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. We establish the necessary condition that allows the optimal sanctions to produce the first best equilibrium.

Suggested Citation

  • Francesco Giuli & Marco Manzo, 2005. "Protecting Savings: Do We Need a Supervision Authority?," Working Papers in Public Economics 84, University of Rome La Sapienza, Department of Economics and Law.
    • Handle: RePEc:sap:wpaper:wp84
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate bond; Incentives; Collusion; Regulation.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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