DP15508 On the (Ir)relevance of Firm Size for Bail-outs under Voter-Neutrality: The Case of Foreign Stakeholders

Author(s): Linda Marlene Schilling
Publication Date: December 2020
Keyword(s): Bailouts, Economic voting, labor migration, political economy, Probabilistic voting, socially optimal bailouts, Too-big-to-fail, vote-share maximization
JEL(s): D72, G3, P16
Programme Areas: Public Economics, Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15508

A failing firm employs domestic and foreign stakeholders. The latter have no voting rights. A politician decides on the vote-share maximizing bailout. In a probabilistic voting model, I analyze whether foreign stakeholders impact bailouts. Stakeholder voters shade their vote to reward the politician, while non-stakeholder voters punish the politician for imposing bailout-financing taxes. If foreign stakeholders neither pay taxes nor receive bailouts (seasonal workers), only voters at the firm level matter. Firms with equally large stakeholder groups receive distinct bailouts in equilibrium, depending on their voter-concentration among stakeholders. If foreigners pay taxes and receive bailouts (greencard holders), they impact the electorate and thus bailouts through monetary transfers despite their lack of voting rights. Then adding foreigners can both increase or decrease bailouts. The measure of all firm stakeholders remains insufficient to determine bailouts. In either case, vote-share maximizing bailouts equal socially optimal bailouts only if all stakeholders are domestic.