Designing Corporate Bailouts

Authors

Antonio E. Bernardo, University of California, Los AngelesFollow
Eric L. Talley, Columbia Law SchoolFollow
Ivo Welch, University of California, Los AngelesFollow

Document Type

Article

Publication Date

2016

DOI

https://doi.org/10.1086/685619

Abstract

Although common economic wisdom suggests that government bailouts are inefficient because they reduce incentives to avoid failure and induce excessive entry by marginal firms, in practice bailouts are difficult to avoid for systemically significant enterprises. Recent experience suggests that bailouts also induce litigation from shareholders and managers complaining about expropriation and wrongful termination by the government. Our model shows how governments can design tax-financed corporate bailouts to reduce these distortions and points to the causes of inefficiencies in real-world implementations such as the Troubled Asset Relief Program. Bailouts with minimal distortion depend critically on the government’s ability to expropriate shareholders and terminate managers.

Disciplines

Bankruptcy Law | Business Organizations Law | Law | Law and Economics

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

Comments

© 2016 by The University of Chicago.

Recommended Citation

Antonio E. Bernardo, Eric L. Talley & Ivo Welch, Designing Corporate Bailouts, 59 J. L. & Econ. 75 (2016).
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/3390