Informational Rents, Macroeconomic Rents, and Efficient Bailouts

Thomas Philippon, Philipp Schnabl

NBER Working Paper No. 16727
Issued in January 2011
NBER Program(s):   CF   EFG   ME   PE

We analyze government interventions to alleviate debt overhang among banks. Interventions generate two types of rents. Informational rents arise from opportunistic participation based on private information while macroeconomic rents arise from free riding. Minimizing informational rents is a security design problem and we show that warrants and preferred stocks are the optimal instruments. Minimizing macroeconomic rents requires the government to condition implementation on sufficient participation. Informational rents always impose a cost, but if macroeconomic rents are large, efficient recapitalizations can be profitable.

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Acknowledgments

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