Too-Big-To-Fail, Government Bailouts, and Managerial Incentives: The Case of Reconstruction Finance Corporation Assistance to the Railroad Industry During the Great Depression

Abstract

Transportation infrastructure has long been thought to be important to economic growth and development. Hence, financial difficulties in the transportation industry have often been considered too-big-to-fail and, as a result, elicited government assistance. Turnpikes, canals, railroads, and airlines have all received government assistance through US history. However, it is unclear whether such assistance helps the target companies recover or just postpones their inevitable demise. The normative public policy bias toward transportation infrastructure seems to be "better too much of a public good (and hence assistance toward that public good) than too little." However, while that normative bias may at first glance appear reasonable, assistance has long been suspected of skewing investment incentives away from those that would obtain in the absence of that assistance.

Keywords: Reconstruction Finance Corporation, RFC, Banking, Railroads, Public Policy

JEL Classification: G21, G28, G34