Bailouts by Representation: A Minimal TLC Theory with Weighted Consent

TL;DR

This paper introduces a theoretical model for provincial bailouts based on Weighted Representative Democracy, resulting in a simple threshold-linear-cap policy with clear institutional implications.

Contribution

It develops a novel TLC policy framework derived from WRD principles, linking representation design to bailout thresholds and caps.

Findings

Threshold-linear-cap policy emerges with quadratic costs.

Increasing political costs raises activation thresholds.

Tighter consent caps lower bailout caps.

Abstract

We develop a purely theoretical mechanism in which provincial bailouts are disciplined by two levers derived from Weighted Representative Democracy (WRD): a political shadow cost of public funds and a weighted-consent cap on any transfer. Bailouts are considered only when an externality threshold is met. With quadratic implementation costs, the static problem yields a simple ''threshold--linear--cap'' (TLC) policy: zero below a lower activation point, linear in the middle, and flat at an upper cap. We characterize a knife-edge for a complete no bailout regime, either because the consent cap blocks all proposals or because the political cost of funds exceeds the maximum marginal benefit of relief. Comparative statics are transparent: increasing the political cost shifts activation upward; tightening the consent cap lowers the upper plateau; joint institutional changes move the two kinks in predictable ways. The WRD mechanism is observation ally equivalent to TLC rules obtained from screening models, yet attributes the same geometry to representation design rather than private information. For implementation and audit, we propose a constrained two-knot spline that recovers three interpretable metrics from data, activation threshold, interior slope, and the cap level, which support routine ex-post compliance checks.