Abstract
This paper analyzes the adverse incentive effects produced by money injections of benefactors (sugar daddies SD). We show that the existence of a SD induces the club to choose a riskier investment strategy and the more the SD commits to bailout the club, the more the clubs’ optimal level of riskiness increases. Moreover, a private SD bails out the club less often than a public SD. Our model further shows that a ”too-big-to-fail” phenomenon exists because it is optimal to always bailout a club if its market size is sufficiently large.
Franck, E