In this paper, we study the optimal credit rating system in an economy where agents need to borrow and have incentives to renege on debt repayments. We show that credit exclusion creates soft collateral in the form of a borrower's reputation. Compared with individual lending, bank lending...

Safe assets play a critical role in an(y) economy. A "safe asset" is an asset that is (almost always) valued at face value without expensive and prolonged analysis. That is, by design there is no benefit to producing (private) information about its value. And this is common knowledge....

Financial crises are bank runs. At root the problem is short-term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches...

Safe assets play a critical role in an(y) economy. A safe asset is an asset that is (almost always) valued at face value without expensive and prolonged analysis. By design, there is no benefit to producing (private) information about its value, and this is common knowledge. Consequently, agents...

A financial crisis is an event in which the holders of short-term debt come to question the collateral backing that debt. So, the resiliency of the financial system depends on the quality of that collateral. We show that there is a shortage of high-quality collateral by examining the convenience...