Working Paper: NBER ID: w28211
Authors: Thomas Philippon
Abstract: I analyze efficient government interventions to mitigate financial distress during a severe macroeconomic downturn. At the macroeconomic level, the key variable is the gap between the real wage and the shadow cost of labor. This gap is large when unemployment is high. At the micro level, laissez-faire leads to excessive liquidation of businesses but an indiscriminate bailout prevents efficient reallocations and implies a large transfer from taxpayers to existing private creditors. I show that a cost-efficient intervention can be achieved with a continuation premium, whereby the government agrees to reduce its claims by the same haircut as private creditors plus a fixed premium.
Keywords: No keywords provided
JEL Codes: D24; G33; G38; H12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gap between the real wage and the shadow cost of labor (J39) | excess liquidation (G33) |
| government intervention (O25) | excess liquidation (G33) |
| laissez-faire policies (P16) | socially excessive liquidations (G33) |
| unemployment levels (J64) | liquidation rates (G33) |
| continuation premium (G22) | business continuation (L26) |
| continuation premium (G22) | liquidation (G33) |