Intervention with Screening in Global Games

Abstract

Policymakers frequently use guarantees to reduce panic-based runs in the financial system. We analyze a binary-action coordination game under the global games framework and propose a novel intervention program that screens investors based on their heterogeneous beliefs about the system's stability. This program attracts only investors who are at the margin of running, and their participation boosts all investors' confidence in the financial system. Compared with government guarantee programs, our proposed program is as effective at reducing panic runs yet features two advantages: it costs less to implement and is robust to moral hazard.