Should the European Union grant state aid through an institution like the European Investment bank? This paper evaluates the efficiency of different measures for granting state aid. We use a theoretical model with firms that differ in their creditworthiness and compare different types of subsidies with indirect subsidization through public banks. We find that, in a large parameter range, the politician prefers public banks to direct subsidies because they avoid windfall gains to entrepreneurs and they economize on screening costs. For similar reasons, they may increase social welfare relative to subsidies. One important prerequisite for this result is that public banks must not be allowed to fully compete with private banks. However, from a welfare perspective, a politician uses public banks inefficiently often.
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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number
CESifo Working Paper No. 2153.
Find related papers by JEL classification: G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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Hendrik Hakenes & Isabel Schnabel, 2006.
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[Downloadable!]
Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996.
"A Theory of Privatisation,"
Economic Journal,
Royal Economic Society, vol. 106(435), pages 309-19, March.
[Downloadable!] (restricted)