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European Defence Firms: The Information Barrier On Private Finance

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  • Damien Besancenot
  • Radu Vranceanu

Abstract

After the fall of the Berlin Wall, European governments adopted a hands-off policy towards the defence industrial base, in an attempt to increase the sector's efficiency and reactivity. In this context, one topical issue is how to motivate defence firms to apply for private rather than public finance. Since banks have no prior experience with European defence firms, a problem of asymmetric information may block this transition. The problem is analysed within the framework of a game between defence firms and banks. It is shown that the Bayesian Equilibrium might correspond to a situation where low-risk firms prefer the state-financed scheme; yet, in a perfect information set-up, the same firms would apply for bank credit. In order to facilitate the transition to private finance, the government might decide to subsidize investors who agree on financing defence firms; the state aid should be made available during a transitory learning period.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Defence and Peace Economics.

Volume (Year): 17 (2006)
Issue (Month): 1 ()
Pages: 23-36

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Handle: RePEc:taf:defpea:v:17:y:2006:i:1:p:23-36

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Related research

Keywords: European defence firms; Private finance; Bayesian Equilibrium; Asymmetric information;

References

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  1. Goyal, Vidhan K. & Lehn, Kenneth & Racic, Stanko, 2002. "Growth opportunities and corporate debt policy: the case of the U.S. defense industry," Journal of Financial Economics, Elsevier, vol. 64(1), pages 35-59, April.
  2. Marc Guyot & Radu Vranceanu, 2001. "European defence: The cost of partial integration," Defence and Peace Economics, Taylor & Francis Journals, vol. 12(2), pages 157-174.
  3. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
  4. Keith Hartley & Todd Sandler, 2003. "The Future of the Defence Firm," Kyklos, Wiley Blackwell, vol. 56(3), pages 361-380, 08.
  5. Keith Hartley, 2003. "The future of European defence policy: An economic perspective," Defence and Peace Economics, Taylor & Francis Journals, vol. 14(2), pages 107-115.
  6. Kollias, Christos & Manolas, George & Paleologou, Suzanna-Maria, 2004. "Defence expenditure and economic growth in the European Union: A causality analysis," Journal of Policy Modeling, Elsevier, vol. 26(5), pages 553-569, July.
  7. Carlos Pestana Barros, 2004. "Measuring performance in defense-sector companies in a small NATO member country," Journal of Economic Studies, Emerald Group Publishing, vol. 31(2), pages 112-128, May.
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Cited by:
  1. Belin, Jean & Guille, Marianne, 2008. "Defence and firm financial structure in France," Review of Financial Economics, Elsevier, vol. 17(1), pages 46-61.

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