61 Pages Posted: 10 Sep 2013
Date Written: September 2009
We analyze public interventions to alleviate debt overhang among private rms when the government has limited information and limited resources. We compare the e¢ ciency of buying equity, purchasing existing assets, and providing debt guarantees. With sym- metric information, all the interventions are equivalent. With asymmetric information between rms and the government, buying equity dominates the two other interven- tions. We solve for the optimal intervention, and show how it can be implemented with subordinated loans and warrants.
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