Destructive Effects of Constructive Ambiguity in Risky Times

Vinogradov, D. (2010) Destructive Effects of Constructive Ambiguity in Risky Times. Working Paper. Essex Finance Centre.

147299.pdf - Published Version



Unclear bailout policy, underinvestment and calls for bankers’ responsibility are some of the observations from the recent financial crisis. The paper explains underinvestment as an inefficient equilibrium. Under ambiguous bailout policy agents suffer from a lack of information with regards to the insolvency resolution methods. Beliefs of bankers regarding whether an insolvent bank is liquidated, may differ from those of depositors even if bankers and depositors possess absolutely symmetric information about the economy. It is shown that such an asymmetry in beliefs results in underinvestment if the investment climate is characterized by high aggregate risk. The paper suggests policy implications aimed at the reduction of anxiety of agents and at aligning their beliefs to restore efficiency.

Item Type:Research Reports or Papers (Working Paper)
Glasgow Author(s) Enlighten ID:Vinogradov, Professor Dmitri
Authors: Vinogradov, D.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Publisher:Essex Finance Centre
Copyright Holders:Copyright © 2010 The Authors
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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