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  • June 2019
  • Article
  • Review of Financial Studies

Social Risk, Fiscal Risk, and the Portfolio of Government Programs

By: Samuel G. Hanson, David S. Scharfstein and Adi Sunderam
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Abstract

We develop a model of government portfolio choice in which a benevolent government chooses the scale of risky projects in the presence of market failures and tax distortions. These two frictions generate motives to manage social risk and fiscal risk. Social risk management makes attractive programs that ameliorate market failures in bad economic times. Fiscal risk management makes unattractive programs that entail large government outlays at times when other programs in the government's portfolio also require large outlays. We characterize the determinants of social and fiscal risk and argue that these two risk management motives often conflict. Using the model, we explore how the attractiveness of different financial stability programs varies with the government's fiscal burden and with characteristics of the economy.

Keywords

Risk Management; Government and Politics; Programs

Citation

Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "Social Risk, Fiscal Risk, and the Portfolio of Government Programs." Review of Financial Studies 32, no. 6 (June 2019): 2341–2382. (Internet Appendix Here.)
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About The Authors

Samuel G. Hanson

Finance
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David S. Scharfstein

Finance
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Adi Sunderam

Finance
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    Rate-Amplifying Investor Demand and the Excess Sensitivity of Long-Term Interest Rates

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More from the Authors
  • Managing Science Communication at Bayer By: Joshua Schwartzstein and Aditya Vikram Sunderam
  • Using Models to Persuade By: Joshua Schwartzstein and Adi Sunderam
  • Rate-Amplifying Investor Demand and the Excess Sensitivity of Long-Term Interest Rates By: Samuel G. Hanson, David O. Lucca and Jonathan H. Wright
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