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, Patrick Bolton Columbia University and NBER Search for other works by this author on: Oxford Academic Tano Santos Columbia University and NBER Search for other works by this author on: Oxford Academic Jose A Scheinkman Columbia University, Princeton University, and NBER Send correspondence to Jose A. Scheinkman, js3317@columbia.edu. Search for other works by this author on: Oxford Academic
The Review of Financial Studies, Volume 34, Issue 3, March 2021, Pages 1408–1444, https://doi.org/10.1093/rfs/hhaa074
Published:
03 July 2020
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Received:
02 January 2018
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Patrick Bolton, Tano Santos, Jose A Scheinkman, Savings Gluts and Financial Fragility, The Review of Financial Studies, Volume 34, Issue 3, March 2021, Pages 1408–1444, https://doi.org/10.1093/rfs/hhaa074
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Abstract
We propose an incentive-based theory of how a savings glut produces financial fragility. Originators must be incentivized to produce high-quality assets. Assets are distributed to informed intermediaries or uninformed investors. A savings glut reduces origination incentives by compressing spreads between the prices paid for high-quality assets by informed intermediaries and prices paid by uninformed investors for generic assets. The narrowing of spreads relaxes intermediaries’ borrowing constraints, resulting in higher leverage. This generates financial fragility: intermediaries are more likely to become insolvent if unforeseen losses arise. Our model offers a coherent narrative of the run-up to the Global Financial Crisis.
© The Author(s) 2020. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com.
This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)
JEL
G01 - Financial Crises G15 - International Financial Markets G23 - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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Editor: Itay Goldstein
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