Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/191428
Authors: 
Amegashie, J. Atsu
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper 7403
Abstract: 
I consider a two-period model in which being “too big” is only a necessary condition for an insolvent firm to receive a government bailout because, in addition to meeting a threshold asset size, the firm must engage in a lobbying contest in order to be bailed out. The firm has a political advantage because its probability of winning the contest is increasing in its size. When the firm experiences an unfavorable price shock, I find that the balance between the size of the requisite bailout and the firm's political advantage of being "too big to fail" determines the firm’s probability of getting a bailout. Surprisingly but consistent with the US government’s differential treatment of Lehman Brothers and Bear Stearns during the 2008-2010 financial crisis, I find that a smaller firm may receive a bailout while a bigger firm will not, although both firms meet the threshold size of “too big to fail” and a firm's political advantage is increasing in its size.
Subjects: 
insolvency
bail-out
biased contest
political advantage
too-big-to-fail
JEL: 
O10
P16
P48
Document Type: 
Working Paper

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