Voters, Bailouts, and the Size of the Firm

Linda Schilling - Aug 03, 2023

Working Paper No.  00122-00

I present a political-economic theory to explain bailouts for failing firms in the
presence of non-voters (foreigners). The governing politician uses the bailout as
a tool to sway voters to maximize re-election chances. Bailouts partially leak to
foreigners at the firm and are financed by tax-paying foreigners outside the firm.
I show larger failing firms are granted larger bailouts even if the additional size is
due to having more foreign stakeholders (“too-big-to-fail- lookalike”). Neverthe-
less, among equally sized firms, the firm with more voting stakeholders receives
the larger bailout, contradicting social optimality. Besides firm size, also voting
rights cause bailouts.

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