Risk-Bearing by the State : When Is It Good Public Policy?

The global financial crisis brought government guarantees to the forefront of the debate. Based on a review of frictions that hinder financial contracting, this paper concludes that the common justifications for government guarantees—i.e., principal-agent frictions or un-internalized externalities i...

Full description

Bibliographic Details
Main Authors:	Anginer, Deniz, de la Torre, Augusto, Ize, Alain
Format:	Journal Article
Language:	en_US
Published:	Elsevier 2013
Subjects:	credit default guarantees credit default insurance risk premia risk aversion public guarantees public risk absorption Arrow-Lind theorem development banks
Online Access:	http://hdl.handle.net/10986/13732

id	okr-10986-13732
recordtype	oai_dc
spelling	okr-10986-137322021-04-23T14:03:10Z Risk-Bearing by the State : When Is It Good Public Policy? Anginer, Deniz de la Torre, Augusto Ize, Alain credit default guarantees credit default insurance risk premia risk aversion public guarantees public risk absorption Arrow-Lind theorem development banks The global financial crisis brought government guarantees to the forefront of the debate. Based on a review of frictions that hinder financial contracting, this paper concludes that the common justifications for government guarantees—i.e., principal-agent frictions or un-internalized externalities in an environment of risk neutrality—are flawed. Even where risk is purely idiosyncratic—and thus diversifiable in principle—government guarantees (typically granted via development banks/agencies) can be justified if private lenders are risk averse and because of the state’s comparative advantage over markets in resolving the collective action frictions that hinder risk spreading. To exploit this advantage while keeping moral hazard in check, however, development banks/agencies have to price their guarantees fairly, crowd in the private sector, and reduce their excessive risk aversion. The latter requires overcoming agency frictions between managers and owner (the state), which would entail a significant reshaping of development banks’ mandates, governance, and risk management systems. 2013-06-04T16:35:25Z 2013-06-04T16:35:25Z 2013-04-10 Journal Article Journal of Financial Stability 1572-3089 http://hdl.handle.net/10986/13732 en_US CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Elsevier Publications & Research :: Journal Article Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	en_US
topic	credit default guarantees credit default insurance risk premia risk aversion public guarantees public risk absorption Arrow-Lind theorem development banks
spellingShingle	credit default guarantees credit default insurance risk premia risk aversion public guarantees public risk absorption Arrow-Lind theorem development banks Anginer, Deniz de la Torre, Augusto Ize, Alain Risk-Bearing by the State : When Is It Good Public Policy?
description	The global financial crisis brought government guarantees to the forefront of the debate. Based on a review of frictions that hinder financial contracting, this paper concludes that the common justifications for government guarantees—i.e., principal-agent frictions or un-internalized externalities in an environment of risk neutrality—are flawed. Even where risk is purely idiosyncratic—and thus diversifiable in principle—government guarantees (typically granted via development banks/agencies) can be justified if private lenders are risk averse and because of the state’s comparative advantage over markets in resolving the collective action frictions that hinder risk spreading. To exploit this advantage while keeping moral hazard in check, however, development banks/agencies have to price their guarantees fairly, crowd in the private sector, and reduce their excessive risk aversion. The latter requires overcoming agency frictions between managers and owner (the state), which would entail a significant reshaping of development banks’ mandates, governance, and risk management systems.
format	Journal Article
author	Anginer, Deniz de la Torre, Augusto Ize, Alain
author_facet	Anginer, Deniz de la Torre, Augusto Ize, Alain
author_sort	Anginer, Deniz
title	Risk-Bearing by the State : When Is It Good Public Policy?
title_short	Risk-Bearing by the State : When Is It Good Public Policy?
title_full	Risk-Bearing by the State : When Is It Good Public Policy?
title_fullStr	Risk-Bearing by the State : When Is It Good Public Policy?
title_full_unstemmed	Risk-Bearing by the State : When Is It Good Public Policy?
title_sort	risk-bearing by the state : when is it good public policy?
publisher	Elsevier
publishDate	2013
url	http://hdl.handle.net/10986/13732
_version_	1764424578751266816

Risk-Bearing by the State : When Is It Good Public Policy?

Similar Items