Too Small to Fail: State Bailouts and Capture by Market Underdogs

תקציר

Bailouts have become a pervasive phenomenon, particularly around the 2008 global financial crisis, as states came to the rescue of financial institutions considered Too Big to Fail (TBTF) faced with imminent bankruptcy. While TBTF bailouts are officially designed to prevent catastrophic domino effects in markets, critics view these bailouts as a result of industry manipulations of regulators and state officials, leading to regulatory capture. Scholars describe regulatory capture as a situation where regulators favor the private interests of regulated firms over public interests, in exchange for legally-dubious gains such as political capital, monetary support, or lucrative future employment opportunities. While the phenomenon of regulatory capture by large and resourceful firms is well researched by economists, jurists, and political scientists, a new unexplained phenomenon, yet to be addressed in academic literature, is emerging in modern economies: the bailout of small firms. Due to the relatively insignificant size and influence of those firms, they cannot be considered economically too big to fail and are usually unable to provide regulators with sufficient incentives to secure bailouts through classic capture. Aiming to explain this phenomenon, this paper develops a Too Small to Fail (TSTF) approach, asserting that small firms adopt an underdog rhetoric designed to facilitate regulatory capture. TSTF firms capture regulatory decision-making for lucrative bailouts by blaming regulation, regulators, global and local catastrophes, or by pleading for special consideration due to social importance. The case studies examined in this paper include U.S.-owned firms in both health and media sectors operating in Israel under Israeli regulation. This is an extremely useful arena for examining the underdog rhetoric of small firms because of its unique geopolitical characteristics and disposition to capture, stemming from an absence of comprehensive regulation policies. The paper concludes with normative suggestions for overcoming TSTF capture by imposing new legal duties on the regulatory decision-making process of administrative agencies.