IDEAS home Printed from https://ideas.repec.org/p/sap/wpaper/wp84.html
   My bibliography  Save this paper

Protecting Savings: Do We Need a Supervision Authority?

Author

Listed:
  • 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, Department of Economics and Law, Sapienza University of Roma.
    • Handle: RePEc:sap:wpaper:wp84
    as

    Download full text from publisher

    File URL: https://www.dipecodir.it/wpsap/data/wp84.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
    2. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    3. Jean-Jacques Laffont & Jean Tirole, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1089-1127.
    4. Kirstein, Roland, 2002. "The new Basle Accord, internal ratings, and the incentives of banks," International Review of Law and Economics, Elsevier, vol. 21(4), pages 393-412, May.
    5. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    6. Baruch Lev, 2003. "Corporate Earnings: Facts and Fiction," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 27-50, Spring.
    7. Laffont, Jean-Jacques, 2001. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780199248681.
    8. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    9. Mehmet Bac, 2001. "Corruption, Connections and Transparency: Does a Better Screen Imply a Better Scene?," Public Choice, Springer, vol. 107(1), pages 87-96, April.
    10. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    11. Laffont, J.-J., 1999. "Political Economy, Information and Incentives," Papers 99.516, Toulouse - GREMAQ.
    12. Joel S. Demski, 2003. "Corporate Conflicts of Interest," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 51-72, Spring.
    13. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    14. Demsetz, Harold, 1969. "Information and Efficiency: Another Viewpoint," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 1-22, April.
    15. Laffont, Jean-Jacques, 1999. "Political economy, information and incentives1," European Economic Review, Elsevier, vol. 43(4-6), pages 649-669, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francesco Giuli & Marco Manzo, 2009. "Enhancing Bank Transparency: What Role for the Supervision Authority?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(4), pages 1-58, December.
    2. Eric Maskin, 2004. "Jean-Jacques Laffont: A Look Back," Journal of the European Economic Association, MIT Press, vol. 2(5), pages 913-923, September.
    3. Georges Dionne, 2003. "The Foundationsof Banks' Risk Regulation: A Review of Literature," THEMA Working Papers 2003-46, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    4. Miguel Boucinha & Carlo Altavilla & Frank Smets & José-Luis Peydró, 2019. "Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers," Working Papers 1137, Barcelona School of Economics.
    5. Ozan Güler & Mike Mariathasan & Klaas Mulier & Nejat G. Okatan, 2021. "The real effects of banks' corporate credit supply: A literature review," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1252-1285, July.
    6. Petrick, Martin, 2004. "Governing Structural Change And Externalities In Agriculture: Toward A Normative Institutional Economics Of Rural Development," IAMO Discussion Papers 14878, Institute of Agricultural Development in Transition Economies (IAMO).
    7. repec:hal:spmain:info:hdl:2441/293qice3lj861rvos9ns14n0h0 is not listed on IDEAS
    8. Mathias Dewatripont & Patrick Legros, 2005. "Public-private partnerships: contract design and risk transfer," ULB Institutional Repository 2013/175947, ULB -- Universite Libre de Bruxelles.
    9. Chen, Qi & Vashishtha, Rahul, 2017. "The effects of bank mergers on corporate information disclosure," Journal of Accounting and Economics, Elsevier, vol. 64(1), pages 56-77.
    10. Wu, Zhenyu & Chua, Jess H. & Chrisman, James J., 2007. "Effects of family ownership and management on small business equity financing," Journal of Business Venturing, Elsevier, vol. 22(6), pages 875-895, November.
    11. Harvey, Campbell R. & Lins, Karl V. & Roper, Andrew H., 2004. "The effect of capital structure when expected agency costs are extreme," Journal of Financial Economics, Elsevier, vol. 74(1), pages 3-30, October.
    12. Kentaro Koga & Satomi Uchino, 2012. "Bank-Firm Relationships and Security Analyst Activities: Evidence from Japan," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 2, pages 49-73, December.
    13. De Chiara, Alessandro & Livio, Luca & Ponce, Jorge, 2018. "Flexible and mandatory banking supervision," Journal of Financial Stability, Elsevier, vol. 34(C), pages 86-104.
    14. Brian Akins & David De Angelis & Maclean Gaulin, 2020. "Debt Contracting on Management," Journal of Finance, American Finance Association, vol. 75(4), pages 2095-2137, August.
    15. Daniel Tut, 2022. "Debt dynamic, debt dispersion and corporate governance," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 19(4), pages 744-771, July.
    16. Enzo Dia, 2004. "Imperfect Information and Monopolistic Pricing in the Banking Industry," Working Papers 74, University of Milano-Bicocca, Department of Economics, revised May 2004.
    17. Raffaele Fiocco & Mario Gilli, 2012. "Bargaining and Collusion in a Regulatory Model," Chapters, in: Joseph E. Harrington Jr & Yannis Katsoulacos (ed.), Recent Advances in the Analysis of Competition Policy and Regulation, chapter 12, Edward Elgar Publishing.
    18. Dementiev, Andrei & Loboyko, Anfisa, 2014. "Trusting partnerships in a regulatory game: The case of suburban railway transport in Russia," Research in Transportation Economics, Elsevier, vol. 48(C), pages 209-220.
    19. Bill Francis & Iftekhar Hasan & Liang Song, 2012. "Are Firm- And Country-Specific Governance Substitutes? Evidence From Financial Contracts In Emerging Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 35(3), pages 343-374, September.
    20. Yun Zhu, 2015. "Political uncertainty and non-pricing terms of financial contract," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 5(1), pages 77-109, June.
    21. Jean Tirole, 1991. "Privatization in Eastern Europe: Incentives and the Economics of Transition," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 221-268, National Bureau of Economic Research, Inc.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sap:wpaper:wp84. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Luisa Giuriato (email available below). General contact details of provider: https://ecodir.web.uniroma1.it/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.