Bailouts by Representation: A Minimal TLC Theory with Weighted Consent

Xinli Guo

Papers from arXiv.org

Abstract: We develop a purely theoretical mechanism in which provincial bailouts are disciplined by two levers derived from Weighted Representative Democracy (WRD): a political shadow cost of public funds and a weighted-consent cap on any transfer. Bailouts are considered only when an externality threshold is met. With quadratic implementation costs, the static problem yields a simple ''threshold--linear--cap'' (TLC) policy: zero below a lower activation point, linear in the middle, and flat at an upper cap. We characterize a knife-edge for a complete no bailout regime, either because the consent cap blocks all proposals or because the political cost of funds exceeds the maximum marginal benefit of relief. Comparative statics are transparent: increasing the political cost shifts activation upward; tightening the consent cap lowers the upper plateau; joint institutional changes move the two kinks in predictable ways. The WRD mechanism is observation ally equivalent to TLC rules obtained from screening models, yet attributes the same geometry to representation design rather than private information. For implementation and audit, we propose a constrained two-knot spline that recovers three interpretable metrics from data, activation threshold, interior slope, and the cap level, which support routine ex-post compliance checks.

Date: 2025-08
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