Bailouts, time inconsistency, and optimal regulation

A macroeconomic view

Research output: Contribution to journalArticle

8 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)2458-2493
Number of pages36
JournalAmerican Economic Review
Volume106
Issue number9
DOIs
StatePublished - Sep 1 2016

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Macroeconomics
Government
Time inconsistency
Optimal regulation
Bailouts
Inefficiency
Bailout
Leverage
Incentives
Bankruptcy costs

Cite this

Bailouts, time inconsistency, and optimal regulation : A macroeconomic view. / Chari, Varadarajan V; Kehoe, Patrick J.

In: American Economic Review, Vol. 106, No. 9, 01.09.2016, p. 2458-2493.

Research output: Contribution to journalArticle

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