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Effectiveness of bailouts in the EU

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Author Info
Ela Glowicka (Wissenschaftszentrum Berlin, Reichpietschufer 50, 10785 Berlin, Germany. glowicka@wz-berlin.de)

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Abstract

Governments in the EU frequently bail out firms in distress by granting state aid. I use data from 86 cases during the years 1995-2003 to examine two issues: the effectiveness of bailouts in preventing bankruptcy and the determinants of bailout policy. The results are threefold. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. The number of failing bailouts could be reduced if European control was tougher. Second, governments’ bailout decisions favored state-owned firms, even though state-owned firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable in the analysis of the hazard rate. Treating it as exogenous underestimates its impact on the bankruptcy probability. Several policy implications of the results are discussed in the paper.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 176.

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Date of creation: Oct 2006
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Handle: RePEc:trf:wpaper:176

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Related research
Keywords: State aid; European Union; Discrete-time hazard; Bivariate probit;

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Find related papers by JEL classification:
K2 - Law and Economics - - Regulation and Business Law
G3 - Financial Economics - - Corporate Finance and Governance
L5 - Industrial Organization - - Regulation and Industrial Policy

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  12. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn. [Downloadable!] (restricted)
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  15. BOADWAY, Robin & MARCEAU, Nicolas & MARCHAND, Maurice, 1994. "Time-Consistent Subsidies to Unlucky Firms," Cahiers de recherche 9413, Université Laval - Département d'économique.
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