Efficient Programs to Support Businesses During and After Lockdowns
I analyze efficient government interventions to mitigate financial distress during a severe macroeconomic downturn. At the macroeconomic level, the key variable is the gap between the real wage and the shadow cost of labor. This gap is large when unemployment is high. At the micro level, laissez-faire leads to excessive liquidation of businesses but an indiscriminate bailout prevents efficient reallocations and implies a large transfer from taxpayers to existing private creditors. I show that a cost-efficient intervention can be achieved with a continuation premium, whereby the government agrees to reduce its claims by the same haircut as private creditors plus a fixed premium.
This paper is based on the keynote RCFS address during the 2020 SFS Cavalcade. I am grateful to Olivier Blanchard, Jean Pisani Ferry, Andrew Ellul, Isil Erel, and Uday Rajan for their comments. Send correspondence to Thomas Philippon, firstname.lastname@example.org. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.