Government Bailout Funds: Balancing Rules and Discretion

Research output: Contribution to journalArticlepeer-review


This paper studies government bailout design in the face of economic failures by multiple firms, with ensuing threats to economic stability. Assuming that a commitment to a bailout magnitude is possible, yet cannot be made contingent on unforeseen circumstances, it is argued that the optimal policy consists of stipulating a bailout fund whose upper limit cannot be exceeded. Such an equilibrium policy provides a balance between flexibility to adjust to future circumstances and restraint of moral hazard incentive faced by the firms. An extension to the baseline model considers the case where corporate interests, divergent from those of the public, play a role, and the cap on bailout spending matters for the bargaining outcome between those interests.

Original languageAmerican English
Pages (from-to)333-342
Number of pages10
JournalJournal of Money, Credit and Banking
Issue number1
StatePublished - 1 Feb 2022

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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