The politician and his banker — How to efficiently grant state aid
AbstractPoliticians should spend money as efficiently as possible. But what is the best method of granting state aid to firms? We use a theoretical model with firms that differ in their success probabilities and compare different types of direct subsidies with indirect subsidies through bank loans. We find that, for a large range of parameters, subsidies through banks entail higher social welfare than direct subsidies, avoiding windfall gains to entrepreneurs and economizing on screening costs. For selfish politicians, subsidizing a bank has the additional advantage that part of the screening costs are born by private banks. Consequently, from a welfare perspective, politicians use subsidized banks inefficiently often.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Public Economics.
Volume (Year): 96 (2012)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/inca/505578
State aid; Subsidized banks; Public banks; Governance;
Other versions of this item:
- Christa Hainz & Hendrik Hakenes, 2009. "The Politician and his Banker – How to Efficiently Grant State Aid," Ifo Working Paper Series Ifo Working Paper No. 71, Ifo Institute for Economic Research at the University of Munich.
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
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