Discussion Paper Details

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Title: Efficient Recapitalization

Author(s): Thomas Philippon and Philipp Schnabl

Publication Date: October 2009

Keyword(s): bailout, capital, financial crisis and moral hazard

Programme Area(s): Financial Economics, International Macroeconomics and Public Economics

Abstract: We analyze public interventions to alleviate debt overhang among private firms when the government has limited information and limited resources. We compare the efficiency of buying equity, purchasing existing assets, and providing debt guarantees. With symmetric information, all the interventions are equivalent. With asymmetric information between firms and the government, buying equity dominates the two other interventions. We solve for the optimal intervention, and show how it can be implemented with subordinated loans and warrants.

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Bibliographic Reference

Philippon, T and Schnabl, P. 2009. 'Efficient Recapitalization'. London, Centre for Economic Policy Research.