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Informational Rents, Macroeconomic Rents, and Efficient Bailouts

Thomas Philippon () and Philipp Schnabl

No 8216, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: bailouts; crises; debt overhang; recapitalization (search for similar items in EconPapers)
JEL-codes: G01 G2 G28 G33 G38 H0 H2 H81 (search for similar items in EconPapers)
Date: 2011-01
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