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The Political Economy of Restructuring and Subsidisation: An International Perspective

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  • Everaert, Greetje M.M.

    ()
    (K.U.Leuven)

Abstract

In today’s increasingly competitive business environment, many firms in declining industries have been confronted with the need to restructure. However, lobbies in these industries have often managed to attract government subsidies instead. This paper looks at the decision of a loss-making firm whether to lobby for subsidies or whether to restructure in the context of a contributions game as in Magee et al. (1989). We further analyse the role of tariffs in restricting uncompetitive practices such as granting state aid to unprofitable firms. Several results stand out. Firstly, there is a trade-off between spending resources on lobbying for subsidies and costly restructuring such that both restructuring and subsidisation take place in our model. Secondly, countervailing tariffs on subsidised exports shift the decision in favour of restructuring, thereby hardening budget constraints. Hence, the model illustrates that external constraints such as countervailing tariffs can help to establish internal financial discipline when first-best solutions are politically unfeasible. Thirdly, the social planner always prefers full restructuring implying that political com-petition comes at a cost of lower economic welfare in our model.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 12/2004.

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Length: 48 pages
Date of creation: 17 Jun 2004
Date of revision:
Handle: RePEc:hhs:bofitp:2004_012

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Keywords: soft budget constraints; restructuring; political economy; lobbying; trade policy; declining industries;

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References

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Cited by:
  1. Ji, Gang, 2005. "Cross listing and firm value - corporate governance or market segmentation? An empirical study of the stock market," BOFIT Discussion Papers 14/2005, Bank of Finland, Institute for Economies in Transition.
  2. Kolesnikova, Irina, 2010. "State Aid for Industrial Enterprises in Belarus: Remedy or Poison?," MPRA Paper 22403, University Library of Munich, Germany.

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