An overlapping generations model of taxpayer bailouts of banks

An overlapping generations model of taxpayer bailouts of banks

The paper constructs an overlapping generations model to evaluate how different bank rescue plans affect banks’ risk-taking incentives. For a non-competitive banking industry, we find bailout with tax imposed on the old generation or equity bail-in to be efficient policies in the sense that they implement socially optimal risk-taking. In a competitive banking sector, no-bailout implements the socially-optimal risk-taking. Bailout policies financed by a tax imposed on the young generation always induce excessive risk-taking.

Oz Shy and Rune Stenbacka

Journal of Financial Stability

December 2017

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