Skip to main content
Article thumbnail
Location of Repository

Enhancing Bank Transparency: What Role for the Supervision Authority?

By Francesco Giuli and Marco Manzo


We apply a three-tier hierarchical model of regulation, developed along the lines of Laffont and Tirole (1993), to an adverse selection problem in the corporate bond market. The bank brings the bonds to the market and informs the potential buyers about the bond risks; a unique benevolent public authority aims at maximising investors welfare. The main goal is to investigate whether this unique authority is able to fully inform the market on a firms true credit worthiness when banks, in order to recover doubtful credits, favour the placement of bonds issued by levered firms by concealing their true risk. By establishing the necessary conditions that allow optimal sanctions to produce the first best equilibrium, we show that the core problem of adverse selection in the corporate bond market does not lie so much in the benevolence of the delegated monitoring system, but rather in the possibility of affecting and sanctioning a firms behaviour.Corporate bond, Incentives, Collusion, Regulation

OAI identifier:

Suggested articles


  1. (1993). A Theory of Incentives in Procurement and Regulation.
  2. (2009). Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.
  3. (2002). Call Up the Reserves: WorldCom’s Disclosure is
  4. (2005). Contract Theory.
  5. (2003). Corporate Conflicts of Interest.”
  6. (2003). Corporate Earnings: Facts and Fiction.”
  7. (2001). Corruption, Connections and Transparency: Does a Better Screen Imply a Better Scene?” Public Choice,
  8. (2001). Financial Rating Agencies: Are They Credible? Insights Into The Reporting Incentives Of Rating Agencies In
  9. (1986). Hierarchies and Bureaucracies: On the Role of Collusion in
  10. (2005). Honest Certification and the Threat of Capture.”
  11. (2000). Incentives and Political Economy.
  12. (1969). Information and Efficiency: Another Viewpoint.”
  13. (1991). Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt.”
  14. (1999). Political Economy,
  15. (2002). The New Basle Accord, Internal Ratings, and the Incentives of
  16. (1991). The Politics of Government Decisionmaking: A Theory of Regulatory Capture.”
  17. (2002). What Went Wrong at Enron.

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.