We develop a tractable dynamic model of collateralized lending in which the degree of adverse selection evolves endogenously due to moral hazard. We use this model to study how government interventions designed to boost liquidity in frozen markets af- fect private incentives to maintain high-quality assets. We show that small interventions can lead to “intervention traps” – expectations concerning future interventions destroy private incentives to improve the quality of collateral, which stunts recovery and war- rants continued market intervention – even when they restore market liquidity. Bigger interventions may lead to faster recoveries, and it may be efficient to continue to inter- vene even after market liquidity is restored. This runs counter to previous findings in static environments where it is optimal to keep interventions as small as possible, and to intervene only when markets are illiquid.
We use a structural econometric model to provide empirical evidence that safety nets in the banking industry lead to additional risk taking. To identify the moral hazard effect of bailout expectations on bank risk, we exploit the fact that regional political factors explain bank bailouts but not bank risk. The sample includes all observed capital preservation measures and distressed exits in the German banking industry during 1995--2006. A change of bailout expectations by two standard deviations increases the probability of official distress from 6.6% to 9.4%, which is economically significant. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
The availability of literature on how to improve the care of paediatric inpatients in rural hospitals is limited. Some simple low-cost and cost-saving interventions will go a long way towards achieving better child. care in hospitals. These interventions reflect the principles of good management and of primary health care.