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Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View

Chari, VV; Kehoe, PJ; (2016) Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View. American Economic Review , 106 (9) pp. 2458-2493. 10.1257/aer.20150157. Green open access

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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.

Type: Article
Title: Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View
Open access status: An open access version is available from UCL Discovery
DOI: 10.1257/aer.20150157
Publisher version: http://doi.org/10.1257/aer.20150157
Language: English
Additional information: Copyright © 2016 by the American Economic Association. Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than AEA must be honored. Abstracting with credit is permitted. The author has the right to republish, post on servers, redistribute to lists and use any component of this work in other works. For others to do so requires prior specific permission and/or a fee. Permissions may be requested from the American Economic Association Administrative Office (https://www.aeaweb.org/contact).
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
URI: https://discovery.ucl.ac.uk/id/eprint/1538762
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