Bailouts by Popular Demand

47 Pages Posted: 4 Apr 2022 Last revised: 12 Jul 2022

See all articles by Stylianos Papageorgiou

Stylianos Papageorgiou

University of Cyprus

Nicholas Ziros

University of Cyprus - Department of Economics

Date Written: July 12, 2022

Abstract

We characterize conditions under which the majority of voters supports a bailout despite incurring bailout expenditures. This yields inefficiently high investments when economic prospects are good. When economic prospects are poor, a policy that generates strictly positive bailout expenditures arises only if it is accompanied by a sufficiently high tax on bailout beneficiaries, thus yielding inefficiently low investments. Politicians' bias against the majority can alleviate the procyclicality of the voters-driven allocative inefficiency, though full correction is not always possible. When households vote domestically but can invest across borders, allocative efficiency occurs but it is prone to politicians' bias.

Keywords: bailouts, electoral competition, exogenous bias

JEL Classification: D72, G18

Suggested Citation

Papageorgiou, Stylianos and Ziros, Nicholas, Bailouts by Popular Demand (July 12, 2022). Available at SSRN: https://ssrn.com/abstract=4053339 or http://dx.doi.org/10.2139/ssrn.4053339

Stylianos Papageorgiou (Contact Author)

University of Cyprus ( email )

Cyprus

Nicholas Ziros

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus

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