Designing Corporate Bailouts
31 Pages Posted: 13 Dec 2013 Last revised: 2 Jan 2017
Date Written: April 7, 2014
Although common economic wisdom suggests that government bailouts are inefficient because they reduce incentives to avoid failure and induce excessive entry by marginal firms, in practice bailouts are difficult to avoid for systemically significant enterprises. Recent experience suggests that bailouts also induce litigation from shareholders and managers complaining about expropriation and wrongful termination by the government. Our model shows how governments can design tax-financed corporate bailouts to reduce these distortions and points to the causes of inefficiencies in real-world implementations such as the Troubled Asset Relief Program. Bailouts with minimal distortion depend critically on the government’s ability to expropriate shareholders and terminate managers.
Keywords: Government Bailout, Moral Hazard, TARP, General Motors, Chrysler
JEL Classification: P16, P14, D72
Suggested Citation: Suggested Citation