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The Political Economy of Restructuring and Subsidisation: An International Perspective

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Author Info
Greetje Everaert

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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. The current paper looks at the decision of loss-making firms whether to lobby for subsidies or whether to restructure in the context of a contributions game as in Magee et al. (1989). We also 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. Thus, the model shows that external constraints such as countervailing tariffs can help to establish internal financial discipline. Thirdly, a social planner always prefers full restructuring implying that political competition comes at a cost of lower economic welfare in our model.

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Paper provided by LICOS - Centre for Institutions and Economic Performance, K.U.Leuven in its series LICOS Discussion Papers with number 13003.

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Length: 43 pages
Date of creation: 2003
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Handle: RePEc:lic:licosd:13003

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Related research
Keywords: Soft Budget Constraints Restructuring Political Economy Lobbying Trade Policy Declining Industries

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Find related papers by JEL classification:
P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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  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. [Downloadable!]
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