State aid and tacit collusion
Both literature and policy debate on State aid or government subsidies have focused on the trade-off between the potential ine¢ ciencies caused by state intervention (inefficient allocation of resources, moral hazard) and the potential gains from intervention (whether related to the resolution of market failures or to the achievement of some dimension of social equity). The debate however has ignored another important negative e¤ect of State aid: governments, by setting up aid schemes to ailing firms, may increase the likelihood of (tacit) collusion in an industry characterised by idiosyncratic shocks. Indeed, in a repeated-game setting, a systematic bailout regime increases the expected profits of a firm from cooperation and simultaneously raises the probability that competitors will still be in business to carry out punishment against cheaters. Despite the generality of the model and of its key insight, we study this problem through an application to the banking sector, as it has recently been subject of much attention within the context of the ongoing economic crisis.
|Date of creation:||2009|
|Contact details of provider:|| Postal: Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy|
Web page: http://www.eui.eu/ECO/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Allen, Franklin & Gale, Douglas, 2004.
"Competition and Financial Stability,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 36(3), pages 453-80, June.
- Perotti, Enrico C & Suarez, Javier, 2001.
"Last Bank Standing: What Do I Gain if You Fail?,"
CEPR Discussion Papers
2933, C.E.P.R. Discussion Papers.
- Mathias Dewatripont & Paul Seabright, 2006.
"Wasteful public spending and state aid control,"
ULB Institutional Repository
2013/9635, ULB -- Universite Libre de Bruxelles.
- Rafael Repullo, 2002.
"Capital requirements, market power, and risk-taking in banking,"
809, Federal Reserve Bank of Chicago.
- Repullo, Rafael, 2004. "Capital requirements, market power, and risk-taking in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 156-182, April.
- Repullo, Rafael, 2003. "Capital Requirements, Market Power and Risk-Taking in Banking," CEPR Discussion Papers 3721, C.E.P.R. Discussion Papers.
- Martin Stephen & Valbonesi Paola, 2008. "Equilibrium State Aid in Integrating Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-39, August.
- Timothy Besley & Paul Seabright, 1999. "The effects and policy implications of state aids to industry: an economic analysis," Economic Policy, CEPR;CES;MSH, vol. 14(28), pages 13-53, 04.
- Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
- Collie, David R., 2000. "State aid in the European Union: The prohibition of subsidies in an integrated market," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 867-884, August.
When requesting a correction, please mention this item's handle: RePEc:eui:euiwps:eco2009/36. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne Banks)
If references are entirely missing, you can add them using this form.