Bailout Stigma
General Finance
2023-10-27 v4 Theoretical Economics
Abstract
We develop a model of bailout stigma where accepting a bailout signals a firm's balance-sheet weakness and worsens its funding prospect. To avoid stigma, high-quality firms either withdraw from subsequent financing after receiving bailouts or refuse bailouts altogether to send a favorable signal. The former leads to a short-lived stimulation with a subsequent market freeze even worse than if there were no bailouts. The latter revives the funding market, albeit with delay, to the level achievable without any stigma, and implements a constrained optimal outcome. A menu of multiple bailout programs also compounds bailout stigma and worsens market freeze.
Cite
@article{arxiv.2006.05640,
title = {Bailout Stigma},
author = {Yeon-Koo Che and Chongwoo Choe and Keeyoung Rhee},
journal= {arXiv preprint arXiv:2006.05640},
year = {2023}
}