Anjos, FernandoDemirci, IremOliveira, Miguel2026-06-082026-06-082026-081544-6123PURE: 164308829PURE UUID: 80af2d43-d63d-403c-857c-edac41258bd4WOS: 001772286600001http://hdl.handle.net/10362/203691Publisher Copyright: © 2026 The Authors.Contrary to the standard view, we argue that bailouts can sometimes alleviate moral hazard. In our model, a lender who interacts with a sequence of borrowers may wish to cultivate a reputation for toughness, by liquidating projects following default. However, when the opportunity cost of liquidation is high and the lender cannot publicly commit to randomization, such reputation may be unsustainable. In a subset of such cases, the possibility of a third-party bailout by the government or another investor is essential for the lender to build/maintain a reputation, by reducing the lender’s short-term incentives to deviate from tough play.7872876engBailoutsMoral hazardRepeated gamesReputationjournal article10.1016/j.frl.2026.110154https://www.webofscience.com/api/gateway?GWVersion=2&SrcApp=nova_api&SrcAuth=WosAPI&KeyUT=WOS:001772286600001&DestLinkType=FullRecord&DestApp=WOS_CPL