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The Politician and his Banker – How to Efficiently Grant State Aid

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  • Christa Hainz

    ()

  • Hendrik Hakenes

Abstract

In 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 Info

Paper 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.

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Date of creation: 2009
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Handle: RePEc:ces:ifowps:_71

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Keywords: State aid; subsidized loans; public bank; governance;

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