Discussion Paper
A Proposal to Eliminate the Distortions Caused by Bailouts
Abstract: We argue that bailouts create tax distortions, subsidy distortions and debt-size externalities. We show that an orderly resolution provision as in the Dodd-Frank Act addresses the tax and subsidy distortions but not the debt-size externalities. A regulatory system that imposes limits on the debt-equity ratio of firms and imposes a Pigouvian tax on their size eliminates the distortions and completely corrects the externalities.
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Bibliographic Information
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Economic Policy Paper
Publication Date: 2016-01-05
Number: 16-1