The Politician and his Banker – How to Efficiently Grant State Aid
AbstractIn the current recession, politicians grant state aid of yet unknown dimensions. But whatis the most efficient measure for granting such aid? We use a theoretical model withfirms that differ in their creditworthiness and compare different types of direct subsidieswith indirectly subsidized loans. We find that, in a large parameter range, politiciansprefer subsidized loans to direct subsidies, because these avoid windfall gains to entrepreneurs,and they economize on screening costs. For similar reasons, subsidized loansmay increase social welfare relative to subsidies. From a welfare perspective, politiciansuse subsidized loans inefficiently often.
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Bibliographic InfoPaper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Paper No. 71.
Date of creation: 2009
Date of revision:
State aid; subsidized loans; public bank; governance;
Other versions of this item:
- Hainz, Christa & Hakenes, Hendrik, 2012. "The politician and his banker — How to efficiently grant state aid," Journal of Public Economics, Elsevier, vol. 96(1), pages 218-225.
- 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
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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