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The Politician and his Banker

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  • Christa Hainz

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  • Hendrik Hakenes

Abstract

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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-11/cesifo1_wp2153.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2153.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2153

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Keywords: public bank; development bank; state aid; subsidies; governance;

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References

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  1. Mathias Dewatripont & Paul Seabright, 2006. ""Wasteful" Public Spending and State Aid Control," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 513-522, 04-05.
  2. Giebe, Thomas & Grebe, Tim & Wolfstetter, Elmar G., 2005. "How to Allocate R&D (and Other) Subsidies: An Experimentally Tested Policy Recommendation," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 108, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
  4. Andrianova, Svetlana & Demetriades, Panicos & Shortland, Anja, 2008. "Government ownership of banks, institutions, and financial development," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 218-252, February.
  5. Dinc, I. Serdar, 2005. "Politicians and banks: Political influences on government-owned banks in emerging markets," Journal of Financial Economics, Elsevier, vol. 77(2), pages 453-479, August.
  6. Shaffer, Sherrill, 1998. "The Winner's Curse in Banking," Journal of Financial Intermediation, Elsevier, vol. 7(4), pages 359-392, October.
  7. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1371-1411, November.
  8. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March.
  9. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
  10. Vittas, Dimitri & Yoon Je Cho, 1995. "Credit policies : lessons from East Asia," Policy Research Working Paper Series 1458, The World Bank.
  11. Hendrik Hakenes & Isabel Schnabel, 2006. "The Threat of Capital Drain: A Rationale for Public Banks?," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2006_11, Max Planck Institute for Research on Collective Goods.
  12. Ilyana Kuziemko & Eric Werker, 2006. "How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 905-930, October.
  13. Franklin Allen & Douglas Gale, 2004. "Financial Intermediaries and Markets," Econometrica, Econometric Society, vol. 72(4), pages 1023-1061, 07.
  14. de Aghion, Beatriz Armendariz, 1999. "Development banking," Journal of Development Economics, Elsevier, vol. 58(1), pages 83-100, February.
  15. Collie, David R., 2000. "State aid in the European Union: The prohibition of subsidies in an integrated market," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 867-884, August.
  16. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
  17. Altunbas, Yener & Evans, Lynne & Molyneux, Philip, 2001. "Bank Ownership and Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 926-54, November.
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Citations

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Cited by:
  1. Arping, Stefan & Lóránth, Gyöngyi & Morrison, Alan D., 2010. "Public initiatives to support entrepreneurs: Credit guarantees versus co-funding," Journal of Financial Stability, Elsevier, vol. 6(1), pages 26-35, April.
  2. Körner, Tobias & Schnabel, Isabel, 2010. "Public Ownership of Banks and Economic Growth - The Role of Heterogeneity," CEPR Discussion Papers 8138, C.E.P.R. Discussion Papers.
  3. Manuel Illueca & Lars Norden & Gregory F. Udell, 2009. "Liberalization, Corporate Governance, and Savings Banks," Mo.Fi.R. Working Papers 17, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  4. Haselmann, Rainer & Marsch, Katharina & Weder di Mauro, Beatrice, 2009. "Real Effects of Bank Governance: Bank Ownership and Corporate Innovation," CEPR Discussion Papers 7488, C.E.P.R. Discussion Papers.
  5. Uwe Vollmer & Diemo Dietrich & Ralf bebenroth, 2009. "Behold the 'Behemoth'. The privatization of Japan Post Bank," Discussion Paper Series 236, Research Institute for Economics & Business Administration, Kobe University.

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