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

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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
Figure 3: Change in Critical Level of Managerial Competence, ¯c1.151.14c1.131.120.26 0.28 0.30 0.32 0.34 0.36Parameters: S = 1, R = 1, c = 1, I 1 = 0.I 239
Page 1 and 2: A Model of Optimal Corporate Bailou
Page 3 and 4: The U.S. sold almost half of its st
Page 5 and 6: As a practical matter for policy ma
Page 7 and 8: firms. 4 However, if government rea
Page 9 and 10: • A “restarted” project proce
Page 11 and 12: constraints, and budgetary constrai
Page 13 and 14: As long as the firm reinvests, sv
Page 15 and 16: In sum, when restarts are unprofita
Page 17 and 18: managers forced the firm into distr
Page 19 and 20: Consequently, when the optimal bail
Page 21 and 22: government bails out the firm optim
Page 23 and 24: expropriated in case of a bailout.
Page 25 and 26: 4.2 Government Funding Constraints
Page 27 and 28: incentives to invest ex ante. When
Page 29 and 30: immediately raises moral-hazard con
Page 31 and 32: In other words, if it is too cheap
Page 33 and 34: A.4 Proof of Lemma 2If the replacem
Page 35 and 36: Under this tax regime, however, it
Page 37: BFiguresFigure 1: The Social Value

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