Working Paper: CEPR ID: DP8216
Authors: Thomas Philippon; Philipp Schnabl
Abstract: We analyze government interventions to alleviate debt overhang among banks. Interventions generate two types of rents. Informational rents arise from opportunistic participation based on private information while macroeconomic rents arise from free riding. Minimizing informational rents is a security design problem and we show that warrants and preferred stocks are the optimal instruments. Minimizing macroeconomic rents requires the government to condition implementation on sufficient participation. Informational rents always impose a cost, but if macroeconomic rents are large, efficient recapitalizations can be profitable.
Keywords: bailouts; crises; debt overhang; recapitalization
JEL Codes: G01; G2; G28; G33; G38; H0; H2; H81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government interventions (H53) | alleviate debt overhang among banks (F65) |
| government interventions (H53) | increase overall investment (E22) |
| alleviate debt overhang among banks (F65) | improve economic efficiency (D61) |
| one bank does not invest (G21) | negatively impacts overall economy (F69) |
| negatively impacts overall economy (F69) | increases defaults among households (G59) |
| increases defaults among households (G59) | worsens debt overhang for other banks (F65) |
| government interventions can break cycle (O25) | provide capital to banks (G21) |
| government can reduce both types of rents (R38) | achieve efficient recapitalizations (G32) |
| form of intervention (C90) | minimizes informational rents (D89) |