Working Paper: NBER ID: w16727
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: debt overhang; government intervention; bank bailouts; informational rents; macroeconomic rents
JEL Codes: E3; G01; G2; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government interventions (E65) | Informational rents (D89) |
| Government interventions (E65) | Macroeconomic rents (D33) |
| Minimizing informational rents (D89) | Security design problem (F52) |
| Optimal instruments (C36) | Minimizing informational rents (D89) |
| Macroeconomic rents (D33) | Government conditioning interventions (P36) |
| Sufficient participation by banks (G21) | Reduced free-riding (H40) |
| Effective government intervention (H10) | Improved economic efficiency (D61) |
| Targeting larger banks (G21) | Maximizing impact of interventions (D78) |
| Deposit insurance (G28) | Decreased intervention costs (O22) |