Christoph Bertsch Claudio Calcagno Mark Le Quement
Abstract
Both literature and policy debate on State aid or government subsidies have focused on the trade-off between the potential ine¢ ciencies caused by state intervention (inefficient allocation of resources, moral hazard) and the potential gains from intervention (whether related to the resolution of market failures or to the achievement of some dimension of social equity). The debate however has ignored another important negative e¤ect of State aid: governments, by setting up aid schemes to ailing firms, may increase the likelihood of (tacit) collusion in an industry characterised by idiosyncratic shocks. Indeed, in a repeated-game setting, a systematic bailout regime increases the expected profits of a firm from cooperation and simultaneously raises the probability that competitors will still be in business to carry out punishment against cheaters. Despite the generality of the model and of its key insight, we study this problem through an application to the banking sector, as it has recently been subject of much attention within the context of the ongoing economic crisis.
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Publisher Info
Paper provided by European University Institute in its series Economics Working Papers with number
ECO2009/36.
Length: Date of creation: 2009 Date of revision: Handle: RePEc:eui:euiwps:eco2009/36
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Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
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