IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v158y2019icp337-350.html
   My bibliography  Save this article

Legislative restraints in corporate bailout design

Author

Listed:
  • Gradstein, Mark
  • Kaganovich, Michael

Abstract

The aftermath of the recent economic crisis saw the largest U.S. government bailout of corporate entities ever. While the bailout was carried out with the explicit goal of restoring stability, it aroused much controversy and public criticism based on moral hazard concerns as well as the exorbitant cost to the taxpayer. This paper examines the bailout design on behalf of an imperfectly informed legislature aimed at shaping the incentives of a policymaker to whom bailout decisions are delegated. We show that important elements of the more moral hazard-proof design entail various legislative procedural hurdles, which effectively make the bailouts dependent on supermajority support.

Suggested Citation

  • Gradstein, Mark & Kaganovich, Michael, 2019. "Legislative restraints in corporate bailout design," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 337-350.
    • Handle: RePEc:eee:jeborg:v:158:y:2019:i:c:p:337-350
    DOI: 10.1016/j.jebo.2018.12.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268118303330
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2018.12.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-286, March.
    2. Jinhui H. Bai & Roger Lagunoff, 2011. "On the Faustian Dynamics of Policy and Political Power," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 17-48.
    3. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    4. Bendor, J. & Glazer, A. & Hammond, T.H., 2000. "Theories of Delegation in Political Science," Papers 00-01-14, California Irvine - School of Social Sciences.
    5. Dal Bo, Ernesto, 2006. "Committees with supermajority voting yield commitment with flexibility," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 573-599, May.
    6. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 441-463.
    7. F. Andrew Hanssen, 2004. "Is There a Politically Optimal Level of Judicial Independence?," American Economic Review, American Economic Association, vol. 94(3), pages 712-729, June.
    8. Acemoglu, Daron & Johnson, Simon & Kermani, Amir & Kwak, James & Mitton, Todd, 2016. "The value of connections in turbulent times: Evidence from the United States," Journal of Financial Economics, Elsevier, vol. 121(2), pages 368-391.
    9. Leah Brooks & Yosh Halberstam & Justin Phillips, 2016. "Spending Within Limits: Evidence From Municipal Fiscal Restraints," National Tax Journal, National Tax Association;National Tax Journal, vol. 69(2), pages 315-352, June.
    10. McCubbins, Mathew D & Noll, Roger G & Weingast, Barry R, 1987. "Administrative Procedures as Instruments of Political Control," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 3(2), pages 243-277, Fall.
    11. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922.
    12. Phillip Swagel, 2015. "Legal, Political, and Institutional Constraints on the Financial Crisis Policy Response," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 107-122, Spring.
    13. Harstad, Bård, 2010. "Strategic delegation and voting rules," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 102-113, February.
    14. Eric Maskin & Jean Tirole, 2004. "The Politician and the Judge: Accountability in Government," American Economic Review, American Economic Association, vol. 94(4), pages 1034-1054, September.
    15. Honohan,Patrick & Laeven,Luc (ed.), 2005. "Systemic Financial Crises," Cambridge Books, Cambridge University Press, number 9780521851855.
    16. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    17. Charles W. Calomiris & Urooj Khan, 2015. "An Assessment of TARP Assistance to Financial Institutions," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 53-80, Spring.
    18. MARA FACCIO & RONALD W. MASULIS & JOHN J. McCONNELL, 2006. "Political Connections and Corporate Bailouts," Journal of Finance, American Finance Association, vol. 61(6), pages 2597-2635, December.
    19. Nosal, Jaromir B. & Ordoñez, Guillermo, 2016. "Uncertainty as commitment," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 124-140.
    20. Blau, Benjamin M. & Brough, Tyler J. & Thomas, Diana W., 2013. "Corporate lobbying, political connections, and the bailout of banks," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3007-3017.
    21. Fleck Robert K. & Hanssen F. Andrew, 2012. "On the Benefits and Costs of Legal Expertise: Adjudication in Ancient Athens," Review of Law & Economics, De Gruyter, vol. 8(2), pages 367-399, October.
    22. Gradstein, Mark, 1999. "Optimal taxation and fiscal constitution," Journal of Public Economics, Elsevier, vol. 72(3), pages 471-485, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mark Gradstein, 2022. "Government Bailout Funds: Balancing Rules and Discretion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 333-342, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mark Gradstein, 2018. "Self-imposition of public oversight," Public Choice, Springer, vol. 175(1), pages 95-109, April.
    2. Mark Gradstein, 2017. "Self-Imposition Of Public Oversight," Working Papers 1711, Ben-Gurion University of the Negev, Department of Economics.
    3. Md. Jahir Uddin Palas & Fernando Moreira, 2022. "The impact of government assistance on banks' efficiency," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1731-1748, April.
    4. Dávila, Eduardo & Walther, Ansgar, 2020. "Does size matter? Bailouts with large and small banks," Journal of Financial Economics, Elsevier, vol. 136(1), pages 1-22.
    5. Fiorino, Nadia & Gavoille, Nicolas & Padovano, Fabio, 2015. "Rewarding judicial independence: Evidence from the Italian Constitutional Court," International Review of Law and Economics, Elsevier, vol. 43(C), pages 56-66.
    6. Carsten Hefeker, 2019. "Political polarization, term length and too much delegation," Constitutional Political Economy, Springer, vol. 30(1), pages 50-69, March.
    7. Lars P. Feld & Stefan Voigt, 2004. "Making Judges Independent – Some Proposals Regarding the Judiciary," CESifo Working Paper Series 1260, CESifo.
    8. Yuliyan Mitkov, 2016. "Inequality and Financial Fragility," Departmental Working Papers 201602, Rutgers University, Department of Economics.
    9. Adrian, Christofer & Garg, Mukesh & Viet Pham, Anh & Phang, Soon-Yeow & Truong, Cameron, 2022. "Policy and oversight of corporate political activities and the cost of equity capital," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(2).
    10. Albuquerque, Rui & Lei, Zicheng & Rocholl, Jörg & Zhang, Chendi, 2020. "Citizens United vs. FEC and corporate political activism," Journal of Corporate Finance, Elsevier, vol. 60(C).
    11. Vuk Vukovic, 2021. "The politics of bailouts: Estimating the causal effects of political connections on corporate bailouts during the 2008–2009 US financial crisis," Public Choice, Springer, vol. 189(1), pages 213-238, October.
    12. Ozlem Akin & Nicholas S. Coleman & Christian Fons-Rosen & José-Luis Peydró, 2016. "Political Connections: Evidence From Insider Trading Around TARP," Working Papers 935, Barcelona School of Economics.
    13. Ernesto Dal Bo, 2002. "Supermajority Voting Rules: Balancing Commitment and Flexibility," Economics Series Working Papers 132, University of Oxford, Department of Economics.
    14. Antonio Estache & L. Wren-Lewis, 2008. "Towards a Theory of Regulation for Developing Countries: Following Laffont's Lead," Working Papers ECARES 2008_018, ULB -- Universite Libre de Bruxelles.
    15. Dal Bo, Ernesto, 2006. "Committees with supermajority voting yield commitment with flexibility," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 573-599, May.
    16. Fleck, Robert K. & Hanssen, F. Andrew, 2010. "Repeated adjustment of delegated powers and the history of eminent domain," International Review of Law and Economics, Elsevier, vol. 30(2), pages 99-112, June.
    17. Favaretto, Federico & Masciandaro, Donato, 2016. "Doves, hawks and pigeons: Behavioral monetary policy and interest rate inertia," Journal of Financial Stability, Elsevier, vol. 27(C), pages 50-58.
    18. Fiorino, Nadia & Gavoille, Nicolas & Padovano, Fabio, 2015. "Rewarding judicial independence: Evidence from the Italian Constitutional Court," International Review of Law and Economics, Elsevier, vol. 43(C), pages 56-66.
    19. Jackowicz, Krzysztof & Kozłowski, Łukasz & Podgórski, Błażej & Winkler-Drews, Tadeusz, 2020. "Do political connections shield from negative shocks? Evidence from rating changes in advanced emerging economies," Journal of Financial Stability, Elsevier, vol. 51(C).
    20. Ozlem Akin & Nicholas S. Coleman & Christian Fons‐Rosen & José‐Luis Peydró, 2021. "Political connections and informed trading: Evidence from TARP," Financial Management, Financial Management Association International, vol. 50(3), pages 619-644, September.

    More about this item

    Keywords

    Political economy; Corporate bailouts;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:158:y:2019:i:c:p:337-350. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.