Bailing Out Conflicted Sovereigns

33 Pages Posted: 31 May 2022

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School

Theofanis Tsoulouhas

University of California-Merced, School of Social Sciences, Humanities & Arts, The Ernest & Julio Gallo Management Program

Date Written: May 21, 2022

Abstract

How should sovereign bailouts take account of the effects bailouts have on policy reforms? Conflicted recipient governments complicate bailout choices because some reforms that spur growth reduce rents that benefit government decision makers. Our model takes account of whether bailout generosity and policy reforms are strategic substitutes, strategic complements or both, and each case implies a different optimal bailout contract, which generally cannot achieve First Best. Conditional forgiveness of some loan payments when economic outcomes are sufficiently favorable can achieve outcomes closer to First Best, and this is so for a small ex ante amount of the bailout subsidy.

Keywords: Sovereign Debt, Rent Seeking, Financial Distress, Moral Hazard.

JEL Classification: F34, H63, D82, D72, D73.

Suggested Citation

Calomiris, Charles W. and Tsoulouhas, Theofanis, Bailing Out Conflicted Sovereigns (May 21, 2022). Journal of Financial Intermediation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4116616

Charles W. Calomiris

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Theofanis Tsoulouhas (Contact Author)

University of California-Merced, School of Social Sciences, Humanities & Arts, The Ernest & Julio Gallo Management Program ( email )

Merced, CA 95343
United States
209-228-4640 (Phone)

HOME PAGE: http://tsoulouhas.info

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