Date Added: Mar 2011
The authors report results from an experiment that evaluates the consequences of having a socially motivated monitor use the market price of a bank's traded assets to decide whether or not to intervene in the bank's operations. Consistent with predictions of a recent theoretical paper by Bond, Goldstein, and Prescott (2009, "BGP"), they find that a possible value-increasing intervention weakens the informational efficiency of markets and that the monitor commits numerous intervention errors. Not anticipated by BGP, they find that a possible value-decreasing action also affects market performance. Further, in both cases the active monitor undermines allocative efficiency, particularly for market fundamentals close to the efficient intervention cutoff.