A Model of Optimal Corporate Bailouts - Faculty of Business and ...

Figure 2: Equilibrium Behavior and Utility as Function of R(A) Tax T 1(B) Total Firm Profit ΠT11.00.80.60.40.2Government Wants ContinuationG+FireFirm Wants Continuationπ10.140.120.100.080.060.040.02Government Wants ContinuationNo GovermentG+FireFirm Wants Continuation0.00.0 0.2 0.4 0.6 0.8 1.0R(C) Incumbent Manager Utility M0.000.0 0.2 0.4 0.6 0.8 1.0R(D) Both Managers’ Utility M0.140.120.100.140.120.10M10.080.060.040.02Government Wants ContinuationNo GovermentG+FireFirm Wants ContinuationM0.080.060.040.02Government Wants ContinuationNo GovermentG+FireFirm Wants Continuation0.000.0 0.2 0.4 0.6 0.8 1.0R0.000.0 0.2 0.4 0.6 0.8 1.0R(E) Manager Wage w 1 (F) Manager Effort (Success Probability) e 1w10.60.50.40.30.20.1Government Wants ContinuationNo GovermentG+Fire0.00.0 0.2 0.4 0.6 0.8 1.0RFirm Wants Continuatione10.60.50.40.30.20.1No GovermentGovernment Wants ContinuationG+Fire0.00.0 0.2 0.4 0.6 0.8 1.0RFirm Wants ContinuationParameters: S = 1, c = 2, I 1 = 0, I 2 = 0.1. Dashed lines apply in the absence of government, exceptin panel D where additional dashed lines to the left of 0.7185 copy the incumbent manager’s utilityfrom panel C. Solid lines apply in the presence of government. (Their dotted continuation lines are theinferior Laffer solution.) Blue lines apply in cases in which the manager is retained, red lines to cases inwhich the manager is fired. The black dash-dotted line in (F) is the unachievable first-best (effort).38