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

Linda Schilling

No 15508, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Bailouts; Political economy; Economic voting; Probabilistic voting; Vote-share maximization; Too-big-to-fail; Labor migration; Socially optimal bailouts (search for similar items in EconPapers)
JEL-codes: D72 G3 P16 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cdm and nep-pol
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