Systematic Bailout Guarantees and Tacit Coordination

Abstract

Both the academic literature and the policy debate on systematic bailout guarantees and Government subsidies have ignored an important effect: in industries where firms may go out of business due to idiosyncratic shocks, Governments may increase the likelihood of (tacit) coordination if they set up schemes that rescue failing firms. In a repeated-game setting, we show that a systematic bailout regime increases the expected profits from coordination and simultaneously raises the probability that competitors will remain in business and will thus be able to "punish" firms that deviate from coordinated behaviour. These effects make tacit coordination easier to sustain and have a detrimental impact on welfare. While the key insight holds across any industry, we study this question with an application to the banking sector, in light of the recent financial crisis and the extensive use of bailout schemes.

Application of regression function model based on panel data in bank resource allocation financial risk management

“…However, some documents after the 2008 crisis pointed out that with the continuous improvement of financial deepening, the positive effect of financial deepening on economic growth is declining; in most cases, the promoting effect of financial deepening on economic growth is only reflected in the financial industry itself. The scale of growth noticed in the short-term is not because the expansion of financial market resources has a beneficial effect on other industries, which is the 'removal from reality to the virtual' often mentioned in the academic circles of our country; in some cases, the commercial banking system, the inefficiency of active business behaviour and financial deepening resulting from high leverage can even hinder technological progress, thereby reducing the potential growth rate of total factor productivity, adversely affecting long-term economic growth expectations and ultimately threatening the robustness of the financial system [5].…”