analyzes how compensation schemes change in reaction to anticipated bail-outs. If there is a risk-shifting problem, bail-out … becomes flatter and effort decreases. If both types of agency problems are present, a sufficiently large increase in bailout … perceptions makes it optimal for a welfare-maximizing regulator to impose caps on bank bonuses. In contrast, raising managers …

bailout policies may benefit social welfare in the long-run. Bailouts improve capital allocation in states where aggregate …

effort choices, and, according to expected utility theory, risk preferences are irrelevant. We derive a closed-form solution …