DP11408 Runs versus Lemons: Information Disclosure and Fiscal Capacity
We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information
can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs.
In our model governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates
the risk of runs and allows a government to pursue a high disclosure strategy. Our model explains why
governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically,
how they can end up spending less than governments that are more fiscally constrained.