Voters, Bailouts, and the Size of the Firm
43 Pages Posted: 14 Dec 2020 Last revised: 25 Jan 2021
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Voters, Bailouts, and the Size of the Firm
On the (Ir)Relevance of Firm Size for Bail-Outs Under Voter-Neutrality: The Case of Foreign Stakeholders
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: Suggested Citation