Both the academic literature and the policy debate on systematic bailout guarantees and Government subsidies have ignored an important effect: in industries where firms may go out of business due to idiosyncratic shocks, Governments may increase the likelihood of (tacit) coordination if they set up schemes that rescue failing firms. In a repeated-game setting, we show that a systematic bailout regime increases the expected profits from coordination and simultaneously raises the probability that competitors will remain in business and will thus be able to "punish" firms that deviate from coordinated behaviour. These effects make tacit coordination easier to sustain and have a detrimental impact on welfare. While the key insight holds across any industry, we study this question with an application to the banking sector, in light of the recent financial crisis and the extensive use of bailout schemes.
Two informed and interested parties (senders) repeatedly send messages to an uninformed party (public). Senders face a trade-off between propagating their favoured opinions, possibly by lying, and maintaining a high audience (or market share), as the state is occasionally revealed and lies cause audiences to switch to the competitor. We fully characterize a focal Markov perfect equilibrium of this game and discuss the impact of exogenous parameters on the truthfulness of equilibrium reporting. In particular, we find that senders’ lying propensities are strategic complements so that increasing one sender’s bias decreases both senders’ truthfulness. We also analyse the role of polarization across senders.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
hi@scite.ai
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.