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European Defence Firms: The Information Barrier On Private Finance

Author

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  • Damien Besancenot
  • Radu Vranceanu

Abstract

After the fall of the Berlin Wall, European governments adopted a hands-off policy towards the defence industrial base, in an attempt to increase the sector's efficiency and reactivity. In this context, one topical issue is how to motivate defence firms to apply for private rather than public finance. Since banks have no prior experience with European defence firms, a problem of asymmetric information may block this transition. The problem is analysed within the framework of a game between defence firms and banks. It is shown that the Bayesian Equilibrium might correspond to a situation where low-risk firms prefer the state-financed scheme; yet, in a perfect information set-up, the same firms would apply for bank credit. In order to facilitate the transition to private finance, the government might decide to subsidize investors who agree on financing defence firms; the state aid should be made available during a transitory learning period.

Suggested Citation

  • Damien Besancenot & Radu Vranceanu, 2006. "European Defence Firms: The Information Barrier On Private Finance," Defence and Peace Economics, Taylor & Francis Journals, vol. 17(1), pages 23-36.
  • Handle: RePEc:taf:defpea:v:17:y:2006:i:1:p:23-36
    DOI: 10.1080/10242690500216580
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    References listed on IDEAS

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    1. Carlos Pestana Barros, 2004. "Measuring performance in defense-sector companies in a small NATO member country," Journal of Economic Studies, Emerald Group Publishing, vol. 31(2), pages 112-128, May.
    2. Keith Hartley, 2003. "The future of European defence policy: An economic perspective," Defence and Peace Economics, Taylor & Francis Journals, vol. 14(2), pages 107-115.
    3. Goyal, Vidhan K. & Lehn, Kenneth & Racic, Stanko, 2002. "Growth opportunities and corporate debt policy: the case of the U.S. defense industry," Journal of Financial Economics, Elsevier, vol. 64(1), pages 35-59, April.
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    5. Kollias, Christos & Manolas, George & Paleologou, Suzanna-Maria, 2004. "Defence expenditure and economic growth in the European Union: A causality analysis," Journal of Policy Modeling, Elsevier, vol. 26(5), pages 553-569, July.
    6. Keith Hartley & Todd Sandler, 2003. "The Future of the Defence Firm," Kyklos, Wiley Blackwell, vol. 56(3), pages 361-380, August.
    7. Marc Guyot & Radu Vranceanu, 2001. "European defence: The cost of partial integration," Defence and Peace Economics, Taylor & Francis Journals, vol. 12(2), pages 157-174.
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    Cited by:

    1. Belin, Jean & Guille, Marianne, 2008. "Defence and firm financial structure in France," Review of Financial Economics, Elsevier, vol. 17(1), pages 46-61.
    2. Jean Belin & Marianne Guille, 2008. "R&D et innovation en France : quel financement pour les entreprises de la Défense ?," Innovations, De Boeck Université, vol. 0(2), pages 33-59.

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