Working Paper No. 10-53:
The Bailout through a Public Choice Lens: Government-Controlled Corporations as a Mechanism for Rent Transfer
Date Posted: October 2010
Abstract (below) | Full text (most recent) on SSRN
Through the Troubled Assets Relief Program (TARP) bailout, the government took a controlling interest in a number of companies that remain publicly traded. There is significant prior debate over the consequences of government control of private-sector resources, but the present dynamic of government ownership through voting equity in publicly traded equity is fairly novel in the modern U.S. economy. This Article considers how the government is likely to put political pressure on firms taking bailout support through its equity voting power to cater to politically influential interest groups.
This Article first explores a number of instances of government pressure at bailed-out firms that have worked in favor of politically influential interest groups. It then explains the process by which this occurs through a novel contribution to public choice theory. This contribution treats rent-seeking as a two-step process by which government-controlled firms use their politically conferred rents to subsidize transfers to interest groups. The Article also examines the incentives facing bureaucrats in overseeing the government’s investment.
This Article then considers the constraints of administrative law and reveals how in this context they offer little remedy against the public choice conflicts of government-controlled firms. In part this is due to the exceptions to administrative law constraints found in the bailout legislation, but in larger part it is due to the fact that the government’s power is often implicit in this context.
This Article closes with an examination of the TARP Recipient Ownership Trust Act, which would house the government’s investment in a number of trusts governed by independent trustees, which among other provisions is designed to serve as a buffer between political pressure and private industry. This Article also offers criticism of a counter-proposal from Professor Emma Coleman Jordan, issued through the Center for American Progress, that requires nomination of “public directors” to the Boards of bailout recipients who are accountable directly to the government.
The result is a thorough understanding of how public choice theory offers some predictions for how the government will use its controlling investment in bailout recipients and an understanding of whether, and to what extent, properly designed trusts can limit some of these costs.