Politically Feasible Public Bailouts

Two key features of the government bailout programs implemented in the 2008- 2009 financial crisis were: first, the general opposition of voters to these programs and second, the implementation of a variety of interventions, ranging from targeted transfers meant to inject capital in particular institutions to untargeted transfers aimed at helping entire sectors. This paper argues that the observed shift in the balance between targeted and untargeted transfers emerges in a political economy environment, when voters posses less information than the government about the shocks hitting the economy, and when firms can lobby the government for socially inefficient transfers. The model shows that the optimal incentives voters can give to an elected politician can lead to persistent effects of government interventions, which triggers a shift towards more untargeted interventions following a crisis.