Legislative Restraint in Corporate Bailout Design
35 Pages Posted: 21 Jul 2018
Date Written: June 04, 2018
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
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