Discussion paper

DP8216 Informational Rents, Macroeconomic Rents, and Efficient Bailouts

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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Citation

Philippon, T and P Schnabl (2011), ‘DP8216 Informational Rents, Macroeconomic Rents, and Efficient Bailouts‘, CEPR Discussion Paper No. 8216. CEPR Press, Paris & London. https://cepr.org/publications/dp8216