Legislative Restraint in Corporate Bailout Design

36 Pages Posted: 22 Oct 2018

See all articles by Mark Gradstein

Mark Gradstein

Ben-Gurion University of the Negev - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); World Bank - Development Research Group (DECRG)

Michael Kaganovich

Indiana University Bloomington - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: October 2018

Abstract

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, which favor selection of the types who are less susceptible to the costs of an economic crisis.

Suggested Citation

Gradstein, Mark and Kaganovich, Michael, Legislative Restraint in Corporate Bailout Design (October 2018). CEPR Discussion Paper No. DP13256, Available at SSRN: https://ssrn.com/abstract=3270934

Mark Gradstein (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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World Bank - Development Research Group (DECRG)

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Michael Kaganovich

Indiana University Bloomington - Department of Economics ( email )

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Bloomington, IN 47405-6620
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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