How does executive authority affect household behavior? I develop a model in which the executive branch of the government is partially constrained. These constraints credibly limit intervention under normal conditions but can be overridden when a sufficiently large fraction of the population is in distress. Households anticipate this and strategically coordinate their financial risks through public markets, creating collective distress that compels government bailouts. Weaker constraints lower the threshold for intervention, making implicit guarantees more likely. The model explains why implicit guarantees are prevalent in China and predicts that such guarantees may discontinuously emerge elsewhere as executive constraints gradually weaken.

The foreign capital flight amid pandemic outbreaks can result in propagation effects in the equity market. With a daily shareholding dataset, this paper investigates the trading behavior of foreign mutual funds in China when it was the epicenter of COVID-19 outbreaks and the subsequent period with global spreads. Using fixed effects and panel structural VAR models, we confirm propagation effects caused by the capital flight of foreign mutual funds. Substantial heterogeneities across foreign funds affiliated and unaffiliated with commercial banks have been uncovered, though they are both found to withdraw from risky stocks as an indication of a "flight to quality." Without implicit guarantees, unaffiliated foreign mutual funds liquidated immediately and more when the pandemic hit China. The resulting price shocks led to further deleverage by bank-affiliated foreign funds on their pre-pandemic risk exposure stocks. Our results shed new light on the behavioral theory of stock market trading featuring fund and stock exposure channels.

Although implicit guarantees are widely used in the shadow banking system, we know very little about its qualitative and quantitative properties. In this paper, we use a micro-level data set on China's shadow bank products to quantify the risk of implicit guarantees. We find a robust empirical fact that banks extend more implicit guarantees to their shadow bank debt (i.e., wealth management products) when their own default risks increase. Our result shows that this effect is particularly stronger when riskier banks plan to issue certificates of deposits in the interbank market. A simple model that is based on a signaling game is proposed to rationalize this fact. The key mechanism of the model is that as a bank's reputation becomes worse, it has stronger incentives to send positive signals to the market, i.e., to boost the realized returns of its shadow bank obligations, although it has no obligation to do so. Our findings show that implicit guarantees have nonlinear negative effects on bank fundamentals and the risk-weight of off-balance-sheet exposure should be increasing in banks' default risks.