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Effectiveness of Bailouts in the EU

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  • Ela Glowicka

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 impact of bailouts on bankruptcy probability and the determinants of bailout policy. I have three main results. 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 public firms, even though public 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. ZUSAMMENFASSUNG - (Die Wirksamkeit von Beihilfe in der EU) Europäische Unternehmen, die in Schwierigkeiten geraten sind, werden regelmäßig von den Regierungen in der EU durch Rettungs- und Restrukturierungsbeihilfen (R&R-Beihilfen) unterstützt. Im vorliegenden Paper werden 86 von der Europäischen Kommission überprüfte Fälle von R&RBeihilfen zwischen 1995 und 2003 herangezogen, um zwei Probleme zu untersuchen: die Auswirkung von R&R-Beihilfen auf die Bankrotthäufigkeit und die bestimmenden Faktoren für Subventionspolitik der Regierungen. Dabei kommt die Studie zu drei Ergebnissen. Es zeigt sich, dass sich die geschätzte Bankrottwahrscheinlichkeit während der ersten vier Jahre nach der Beihilfe erhöht und danach sinkt. Dies deutet darauf hin, dass einige Beihilfen den Marktaustritt nur verzögern, anstatt ihn zu verhindern. Die Zahl der Firmen, die erfolglos Beihilfe bekommen, könnte durch eine strengere europäische Beihilfekontrolle verringert werden. Das zweite Ergebnis besagt, dass die Regierungen bei der Beihilfevergabe staatliche Unternehmen bevorzugt haben, obwohl staatliche Unternehmen gegenüber den privaten keine bessere Überlebenswahrscheinlichkeit haben. Drittens ist die Beihilfewahl eine endogene Variable in der Analyse der Bankrottwahrscheinlichkeit. Sie als exogen zu behandeln bedeutet, ihre Auswirkung auf die Bankrottwahrscheinlichkeit zu unterschätzen.

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Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number SP II 2006-05.

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Length: 45 pages
Date of creation: May 2006
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Handle: RePEc:wzb:wzebiv:spii2006-05

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Keywords: AState aid; European Union; Discrete-time hazard; Bivariate probit;

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References

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  1. Boadway, R. & Marceau, N. & Marchand, M., . "Time-consistent subsidies to unlucky firms," CORE Discussion Papers RP -1220, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  6. Ela Glowicka, 2005. "Bailouts in a Common Market: A Strategic Approach," CIG Working Papers SP II 2005-20, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  7. Lin, Justin Yifu & Cai, Fang & Li, Zhou, 1998. "Competition, Policy Burdens, and State-Owned Enterprise Reform," American Economic Review, American Economic Association, vol. 88(2), pages 422-27, May.
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  9. Joseph P. Hughes & Loretta J. Mester, 1991. "A quality and risk-adjusted cost function for banks: evidence on the " too-big-to-fail" doctrine," Working Papers 91-21, Federal Reserve Bank of Philadelphia.
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  12. Maskin, Eric & Xu, Cheng-Gang, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers 2715, C.E.P.R. Discussion Papers.
  13. Chiara Monfardini & Rosalba Radice, 2008. "Testing Exogeneity in the Bivariate Probit Model: A Monte Carlo Study," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(2), pages 271-282, 04.
  14. Couwenberg, Oscar, 2001. "Survival rates in bankruptcy systems : overlooking the evidence," Research Report 01E15, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  15. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn.
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Cited by:
  1. Bortolotti, Bernardo & Cambini, Carlo & Rondi, Laura, 2013. "Reluctant regulation," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 804-828.

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