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We present a model in which banks trade toxic assets to raise funds for investment. The toxic assets generate an adverse selection problem and, as a consequence, the interbank asset market provides insufficient liquidity to finance investment. While the best investments are fully funded, socially efficient projects with modest payoffs are not. Investment is inefficiently low because acquiring funding requires banks to sell high-quality assets for less than their "fair" value. We then consider whether equity injections and asset purchases can improve market outcomes. Equity injections do not improve liquidity and may be counterproductive as a policy for increasing investment. By allowing banks to fund investments without having to sell high-quality assets, equity injections reduce the number of high-quality assets traded and further contaminate the interbank market. Paradoxically, if equity injections are directed to firms with the greatest liquidity needs, the contamination effect causes investment to fall. In contrast, asset purchase programs, like the Public-Private Investment Program, often have favorable impacts on liquidity, investment and welfare.

Zonder onderwerpscode: economie

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We implemented a field experiment designed to increase participants' willingness to visit a health clinic. We find differential responses to a $50 incentive framed as a loss versus framed as a gain. We find little support for the notion that loss aversion is responsible for the effectiveness of loss framing. Instead, it appears that loss framing promotes take-up by raising the perceived probability that the incentive will be provided as promised. The results suggest trust is an alternative pathway through which loss framing may affect behavior, and trust may be an important way to promote desirable health behaviors.