Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts

Emmanuel Farhi, and Jean Tirole


The paper shows that time-consistent, imperfectly targeted support to distressed institutions makes private leverage choices strategic complements. When everyone engages in maturity mismatch, authorities have little choice but intervening, creating both current and deferred (sowing the seeds of the next crisis) social costs. In turn, it is profitable to adopt a risky balance sheet. These insights have important consequences, from banks choosing to correlate their risk exposures to the need for macro-prudential supervision. Keywords: monetary policy, funding liquidity risk, strategic complementarities, macro-prudential supervision


monetary policy; funding liquidity risk; strategic complementarities; macro-prudential supervision;

JEL codes

  • E44: Financial Markets and the Macroeconomy
  • E52: Monetary Policy
  • G28: Government Policy and Regulation


Emmanuel Farhi, and Jean Tirole, Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts, TSE Working Paper, n. 09-052, June 2009, revised October 2010, 49 pages.

See also

Published in

American Economic Review, vol. 102, February 2012, pp. 60–93