Working Paper: CEPR ID: DP7516
Authors: Thomas Philippon; Philipp Schnabl
Abstract: We analyze public interventions to alleviate debt overhang among private firms when the government has limited information and limited resources. We compare the efficiency of buying equity, purchasing existing assets, and providing debt guarantees. With symmetric information, all the interventions are equivalent. With asymmetric information between firms and the government, buying equity dominates the two other interventions. We solve for the optimal intervention, and show how it can be implemented with subordinated loans and warrants.
Keywords: bailout; capital; financial crisis; moral hazard
JEL Codes: G3; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| symmetric information (D82) | equivalence of interventions in reducing debt overhang (H63) |
| equity purchases (G34) | reduction of debt overhang (G32) |
| asymmetric information (D82) | effectiveness of interventions (I24) |
| equity purchases (G34) | reduced opportunistic participation by firms (L19) |