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The aftermath of the recent economic crisis saw the largest U.S. government bailout of corporate entities ever. While the bailout was carried out with the explicit goal of restoring stability, it aroused much controversy and public criticism based on moral hazard concerns and the exorbitant cost to the taxpayer. This paper purports to make a contribution by exploring bailout decision making mechanisms in the face of multiple firms' failures under incomplete contracting. It explores, in particular, the design of such mechanisms on behalf of an imperfectly informed legislature aimed at shaping the incentives of a policymaker to whom bailout decisions are delegated and who is potentially biased toward corporate interests. A ceiling on the bailout magnitude, which can only be exceeded through the legislature's consent, and appointment of a policymaker with a low vulnerability to shocks are shown to be important elements of the design.
