Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View
American Economic Review
vol. 106,
no. 9, September 2016
(pp. 2458-93)
Abstract
A common view is that bailouts of firms by governments are needed to cure inefficiencies in private markets. We propose an alternative view: even when private markets are efficient, costly bankruptcies will occur and benevolent governments without commitment will bail out firms to avoid bankruptcy costs. Bailouts then introduce inefficiencies where none had existed. Although granting the government orderly resolution powers which allow it to rewrite private contracts improves on bailout outcomes, regulating leverage and taxing size is needed to achieve the relevant constrained efficient outcome, the sustainably efficient outcome. This outcome respects governments' incentives to intervene when they lack commitment.Citation
Chari, V. V., and Patrick J. Kehoe. 2016. "Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View." American Economic Review, 106 (9): 2458-93. DOI: 10.1257/aer.20150157Additional Materials
JEL Classification
- D86 Economics of Contract: Theory
- E32 Business Fluctuations; Cycles
- G33 Bankruptcy; Liquidation
- H81 Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
- L51 Economics of Regulation