S. Nagarajan et Cw. Sealey, STATE-CONTINGENT REGULATORY MECHANISMS AND FAIRLY PRICED DEPOSIT INSURANCE, Journal of banking & finance, 22(9), 1998, pp. 1139-1156
This paper presents a model of incentive compatible bank regulation un
der moral hazard and adverse selection. We derive a wide range of simp
le and conceptually implementable mechanisms that can solve each type
of incentive problem separately and also achieve the first-best outcom
e - but only when regulatory instruments involve ex post pricing that
is contingent on the bank's performance relative to the market. An imp
ortant feature of these mechanisms is that they do not involve a subsi
dy io the bank. When the regulator faces both moral hazard and adverse
selection simultaneously, we identify the conditions under which the
same mechanism can achieve the first-best solution. (C) 1998 Elsevier
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