Voters, Bailouts, and the Size of the Firm

43 Pages Posted: 14 Dec 2020 Last revised: 25 Jan 2021

See all articles by Linda Schilling

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School

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Date Written: December 3, 2020

Abstract

Confronted with a failing firm, a politician sets a bailout to maximize his reelection chances. The voters among the firm’s stakeholders reward him for the bailout, while the remaining voters punish him in the elections since they finance the bailout via taxes. The firm also employs non-voting foreign stakeholders. I study how vote-share maximizing bailouts are driven by the firm’s size as opposed to the share of voters among the firm’s stakeholders. The share of voters at the firm level is a confounding variable, driving both firm size and bailouts. Employing more foreign workers increases bailouts if foreigners pay taxes.

Keywords: bailouts, political economy, economic voting, probabilistic voting, vote-share maximization, too-big-to-fail, socially optimal bailouts

JEL Classification: G3, P16, D72

Suggested Citation

Schilling, Linda, Voters, Bailouts, and the Size of the Firm (December 3, 2020). Available at SSRN: https://ssrn.com/abstract=3731110 or http://dx.doi.org/10.2139/ssrn.3731110

Linda Schilling (Contact Author)

Washington University in Saint Louis, John M. Olin Business School ( email )

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