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The Politician and his Banker

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  • Christa Hainz

    ()

  • 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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    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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