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Too many Voters to Fail: Influencing and Political Bargaining for Bailouts

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  • Schilling, Linda

Abstract

The paper provides a novel theory of how banks not only exploit but also cause being perceived as 'too big to fail'. Bank creditors are also voters. Economic voting prompts politicians to grant bailouts given a bank failure. The bank's capital structure acts as a tool to impact the electoral vote and thus the bail-out by changing the relative group size of voters who favor as opposed to voters who object the bailout. The creditors' anticipation of high bailouts, in return, allows the bank to reduce funding costs today, by this maximizing revenues.

Suggested Citation

  • Schilling, Linda, 2019. "Too many Voters to Fail: Influencing and Political Bargaining for Bailouts," CEPR Discussion Papers 14243, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14243
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    References listed on IDEAS

    as
    1. Yuliyan Mitkov & Todd Keister, 2017. "Bailouts, Bail-ins and Banking Crises," 2017 Meeting Papers 60, Society for Economic Dynamics.
    2. Assar Lindbeck & Jörgen Weibull, 1987. "Balanced-budget redistribution as the outcome of political competition," Public Choice, Springer, vol. 52(3), pages 273-297, January.
    3. Todd Keister & Vijay Narasiman, 2016. "Expectations vs. Fundamentals- driven Bank Runs: When Should Bailouts be Permitted?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 89-104, July.
    4. O'Hara, Maureen & Shaw, Wayne, 1990. "Deposit Insurance and Wealth Effects: The Value of Being "Too Big to Fail."," Journal of Finance, American Finance Association, vol. 45(5), pages 1587-1600, December.
    5. Becker, Gary S., 1985. "Public policies, pressure groups, and dead weight costs," Journal of Public Economics, Elsevier, vol. 28(3), pages 329-347, December.
    6. V. V. Chari & Patrick J. Kehoe, 2016. "Bailouts, Time Inconsistency, and Optimal Regulation: A Macroeconomic View," American Economic Review, American Economic Association, vol. 106(9), pages 2458-2493, September.
    7. Kevin M. Murphy & Andrei Shleifer, 2004. "Persuasion in Politics," American Economic Review, American Economic Association, vol. 94(2), pages 435-439, May.
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    Cited by:

    1. Schilling, Linda, 2020. "On the (Ir)relevance of Firm Size for Bail-outs under Voter-Neutrality: The Case of Foreign Stakeholders," CEPR Discussion Papers 15508, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Corporate finance; Bail-outs; Political economy; Economic voting; Capital structure; Influencing;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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