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The Politician and his Banker

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  • Christa Hainz

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  • Hendrik Hakenes

Abstract

Should the European Union grant state aid through an institution like the European Investment bank? This paper evaluates the efficiency of different measures for granting state aid. We use a theoretical model with firms that differ in their creditworthiness and compare different types of subsidies with indirect subsidization through public banks. We find that, in a large parameter range, the politician prefers public banks to direct subsidies because they avoid windfall gains to entrepreneurs and they economize on screening costs. For similar reasons, they may increase social welfare relative to subsidies. One important prerequisite for this result is that public banks must not be allowed to fully compete with private banks. However, from a welfare perspective, a politician uses public banks inefficiently often.

Suggested Citation

  • Christa Hainz & Hendrik Hakenes, 2007. "The Politician and his Banker," CESifo Working Paper Series 2153, CESifo Group Munich.
    • Handle: RePEc:ces:ceswps:_2153
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    References listed on IDEAS

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    Cited by:

    1. Tobias Körner & Isabel Schnabel, 2010. "Public Ownership of Banks and Economic Growth – The Role of Heterogeneity," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_41, Max Planck Institute for Research on Collective Goods.
    2. Uwe Vollmer & Diemo Dietrich & Ralf bebenroth, 2009. "Behold the 'Behemoth'. The privatization of Japan Post Bank," Discussion Paper Series 236, Research Institute for Economics & Business Administration, Kobe University.
    3. Haselmann, Rainer & Marsch, Katharina & Weder di Mauro, Beatrice, 2009. "Real Effects of Bank Governance: Bank Ownership and Corporate Innovation," CEPR Discussion Papers 7488, C.E.P.R. Discussion Papers.
    4. Lazzarini, Sergio G. & Musacchio, Aldo & Bandeira-de-Mello, Rodrigo & Marcon, Rosilene, 2015. "What Do State-Owned Development Banks Do? Evidence from BNDES, 2002–09," World Development, Elsevier, vol. 66(C), pages 237-253.
    5. Arping, Stefan & Lóránth, Gyöngyi & Morrison, Alan D., 2010. "Public initiatives to support entrepreneurs: Credit guarantees versus co-funding," Journal of Financial Stability, Elsevier, vol. 6(1), pages 26-35, April.
    6. Manuel Illueca & Lars Norden & Gregory F. Udell, 2009. "Liberalization, Corporate Governance, and Savings Banks," Mo.Fi.R. Working Papers 17, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

    More about this item

    Keywords

    public bank; development bank; state aid; subsidies; governance;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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