Designing Corporate Bailouts

31 Pages Posted: 13 Dec 2013 Last revised: 2 Jan 2017

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area

Eric L. Talley

Columbia University - School of Law

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: April 7, 2014

Abstract

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

Bernardo, Antonio E. and Talley, Eric L. and Welch, Ivo, Designing Corporate Bailouts (April 7, 2014). Journal of Law and Economics, Vol. 59, No. 1, 2016. Available at SSRN: https://ssrn.com/abstract=2366438 or http://dx.doi.org/10.2139/ssrn.2366438

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2198 (Phone)
310-206-5455 (Fax)

Eric L. Talley

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

Ivo Welch (Contact Author)

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
C519
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)

HOME PAGE: http://www.ivo-welch.info

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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