Finance Seminar

Abstract: I present a political agency theory of bailouts. Households have political agency, and financial markets (1) tie together the balance sheets of disparate households and (2) provide a public coordination mechanism, allowing households to endow risky assets with implicit government guarantees. My theory explains the rise of the "Fed put" in the United States and the pervasiveness of implicit government guarantees in China. In contrast to the literature on optimal government intervention, my model predicts that intervention will increase with financial development; implicit government guarantees arise with increases in financial inclusion, fiscal capacity, and market size.