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Title: Informational Rents, Macroeconomic Rents, and Efficient Bailouts

Author(s): Thomas Philippon and Philipp Schnabl

Publication Date: January 2011

Keyword(s): bailouts, crises, debt overhang and recapitalization

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: We analyze government interventions to alleviate debt overhang among banks. Interventions generate two types of rents. Informational rents arise from opportunistic participation based on private information while macroeconomic rents arise from free riding. Minimizing informational rents is a security design problem and we show that warrants and preferred stocks are the optimal instruments. Minimizing macroeconomic rents requires the government to condition implementation on sufficient participation. Informational rents always impose a cost, but if macroeconomic rents are large, efficient recapitalizations can be profitable.

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Bibliographic Reference

Philippon, T and Schnabl, P. 2011. 'Informational Rents, Macroeconomic Rents, and Efficient Bailouts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8216