Template-Type: ReDIF-Paper 1.0
Title: Inequality and Financial Fragility
Author-Name: Yuliyan Mitkov
Author-Email: ymitkov@uni-bonn.de
Classification-JEL: E61, G21, G28
Keywords: Inequality, Financial Fragility, Bailouts, Limited Commitment

Abstract: I study how the distribution of wealth influences the government’s
response to a banking crisis and the fragility of the financial system.
Distributional concerns tend to make full government guarantees of deposits
in a systemic crisis credible for relatively poor agents, but not for wealthier
agents. As a result, wealthier agents will have a stronger incentive to panic
and, in equilibrium, the institutions in which they invest will be endogenously
more likely to experience a run and receive a partial bailout. Thus, even under
a utilitarian policy maker, bailout payments may be directed towards
the wealthy at the expense of the general public. Moreover, the shape of
the wealth distribution affects the level of fragility in the financial system.
The recognition of this fact may alter the government’s desire to redistribute
wealth ex ante.

Note: 
Length: 51
Creation-Date: 2019-05
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp090
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2019_090