The paper provides a first analysis of market jumpstarting and its two-way interaction between mechanism design and participation constraints. The government optimally overpays for the legacy assets and cleans up the market of its weakest assets, through a mixture of buybacks and equity injections, and leaves the firms with the strongest legacy assets to the market. The government reduces adverse selection enough to let the market rebound, but not too much, so as to limit the cost of intervention. The existence of a market imposes no welfare cost.
market freeze; market rebound; asset repurchases; recapitalization; mechanism design; mechanism-dependent participation constraint;
- H81: Governmental Loans • Loan Guarantees • Credits • Grants • Bailouts
American Economic Review, vol. 102, February 2012, pp. 29–59