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Destructive Effects of Constructive Ambiguity in Risky Times

Vinogradov, Dmitri (2010) Destructive Effects of Constructive Ambiguity in Risky Times. Working Paper. EBS Working Papers, Colchester.

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Abstract

Unclear bailout policy, underinvestment and calls for bankers’ responsibility are some of the observations from the recent financial crisis. The paper explains underinvestment as an inefficient equilibrium. Under ambiguous bailout policy agents suffer from a lack of information with regards to the insolvency resolution methods. Beliefs of bankers regarding whether an insolvent bank is liquidated, may differ from those of depositors even if bankers and depositors possess absolutely symmetric information about the economy. It is shown that such an asymmetry in beliefs results in underinvestment if the investment climate is characterized by high aggregate risk. The paper suggests policy implications aimed at the reduction of anxiety of agents and at aligning their beliefs to restore efficiency.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: bank bailouts; constructive ambiguity
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Users 161 not found.
Date Deposited: 03 Jan 2014 10:15
Last Modified: 13 Nov 2015 16:50
URI: http://repository.essex.ac.uk/id/eprint/8100

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