Should We Have or Should We Have Not, and Who Should Have Paid?

28 Pages Posted: 5 Mar 2011

See all articles by Benjamin Bental

Benjamin Bental

University of Haifa - Department of Economics

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: March 1, 2011

Abstract

We analyze an overlapping generations model which explicitly includes a secondary asset market. The economy is affected by a onetime shock which causes some of these assets to become toxic. As a response the government may intervene by buying these assets at market value and removing them from trade. When the shock is not anticipated we find that government intervention cannot improve upon the laissez-faire equilibrium. However, when agents anticipate that a crisis may occur, removing the toxic assets dominates laissez-faire, particularly when the toxic asset holders are financing the intervention scheme. Finally, we show that curbing incentives which drive investors to find high yield opportunities decreases the severity of a crisis once it occurs, but also output.

Keywords: Crisis, Toxic Assets, Intervention

JEL Classification: E44, E61

Suggested Citation

Bental, Benjamin and Demougin, Dominique, Should We Have or Should We Have Not, and Who Should Have Paid? (March 1, 2011). European Business School Research Paper No. 11-05, Available at SSRN: https://ssrn.com/abstract=1775029 or http://dx.doi.org/10.2139/ssrn.1775029

Benjamin Bental

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

Dominique Demougin (Contact Author)

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

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