Legislative Restraint in Corporate Bailout Design

35 Pages Posted: 21 Jul 2018

See all articles by Mark Gradstein

Mark Gradstein

Ben-Gurion University of the Negev - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); World Bank - Development Research Group (DECRG)

Michael Kaganovich

Indiana University Bloomington - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: June 04, 2018

Abstract

The aftermath of the recent economic crisis saw the largest U.S. government bailout of corporate entities ever. While the bailout was carried out with the explicit goal of restoring stability, it aroused much controversy and public criticism based on moral hazard concerns as well as the exorbitant cost to the taxpayer. This paper examines the bailout design on behalf of an imperfectly informed legislature aimed at shaping the incentives of a policymaker to whom bailout decisions are delegated. We show that important elements of the design entail legislative procedural hurdles such as criteria for appointing policymaking executives with future bailout powers, which favor selection of the types who are less susceptible to the costs of an economic crises.

Keywords: political economy, corporate bailouts

JEL Classification: E600, H110

Suggested Citation

Gradstein, Mark and Kaganovich, Michael, Legislative Restraint in Corporate Bailout Design (June 04, 2018). CESifo Working Paper Series No. 7076, Available at SSRN: https://ssrn.com/abstract=3212544 or http://dx.doi.org/10.2139/ssrn.3212544

Mark Gradstein (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

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Michael Kaganovich

Indiana University Bloomington - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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