Efficient Ex-Ante Stabilization of Firms

Research Cluster

Further details

Abstract

Distressed …rms are vulnerable to ine¢ cient panic-based runs of their workers, suppliers, and customers. A policymaker may try to prevent such a run by pledging to
protect the interests of these stakeholders should a …rm cease to do business. However, this promise also enables the …rm to demand better terms of trade from its stakeholders, which blunts the policy’s e¤ectiveness. We show how to avoid such an adverse response by the use of partial, countercyclical insurance. Under certain conditions, such a scheme costlessly implements the …rst-best outcome in the limit as the stakeholders’ information becomes precise.