Working Paper: CEPR ID: DP13256
Authors: Mark Gradstein; Michael Kaganovich
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.
Keywords: Political Economy; Corporate Bailouts
JEL Codes: E6; H11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legislative procedures (D72) | Policymaker selection (D72) |
| Policymaker selection (D72) | Moral hazard (G52) |
| Policymaker bias (D72) | Bailout magnitude (H81) |
| Expertise trade-off (F12) | Decision-making bias (D91) |
| Number of failed firms (G33) | Likelihood of crisis (H12) |