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A simple model of corporate bailouts in a globalized economy

Author

Listed:
  • Nelly Exbrayat

    (Univ Lyon, UJM Saint-Etienne, GATE UMR 5824, F-42023 Saint-Etienne, France)

  • Thierry Madiès

    (University of Fribourg, Faculté des sciences économiques et sociales, boulevard de Perolles, 90, 1700 Fribourg (Switzerland))

  • Stéphane Riou

    (Univ Lyon, UJM Saint-Etienne, GATE UMR 5824, F-42023 Saint-Etienne, France)

Abstract

This paper explores how globalization influences the decision of governments to rescue inefficient domestic firms when bailouts affect firms'markups. We develop a model of international trade where immobile domestic enterprises (DOEs) compete with foreign enterprises (FOEs) in an oligopolistic market. The decision to bail out DOEs leads to lower corporate tax revenues if FOEs are immobile whereas tax revenues might increase if FOEs are mobile. Interestingly, the mobility of FOEs makes governments more prone to rescue inefficient domestic firms because tax competition reduces the opportunity cost of a bailout policy in terms of public good provision.

Suggested Citation

  • Nelly Exbrayat & Thierry Madiès & Stéphane Riou, 2019. "A simple model of corporate bailouts in a globalized economy," Working Papers 1913, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    • Handle: RePEc:gat:wpaper:1913
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    References listed on IDEAS

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    More about this item

    Keywords

    bailout of manufacturing firms; tax competition; trade costs; firm mobility;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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