Bailout Stigma

TL;DR

This paper models how bailout stigma affects firm behavior and market outcomes, showing that stigma can lead to market freezes or delayed recoveries, and that multiple bailout options can worsen these effects.

Contribution

It introduces a novel model of bailout stigma, analyzing its impact on firm signaling and market dynamics, including the effects of multiple bailout programs.

Findings

Bailout stigma causes firms to withdraw or refuse bailouts, leading to market freezes.

Refusing bailouts can revive markets with delay, achieving near-optimal outcomes.

Multiple bailout programs exacerbate stigma and worsen market freezes.

Abstract

We develop a model of bailout stigma where accepting a bailout signals a firm's balance-sheet weakness and worsens its funding prospect. To avoid stigma, high-quality firms either withdraw from subsequent financing after receiving bailouts or refuse bailouts altogether to send a favorable signal. The former leads to a short-lived stimulation with a subsequent market freeze even worse than if there were no bailouts. The latter revives the funding market, albeit with delay, to the level achievable without any stigma, and implements a constrained optimal outcome. A menu of multiple bailout programs also compounds bailout stigma and worsens market freeze.