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Systematic bailout guarantees and tacit coordination

Author

Listed:
  • Bertsch, Christoph

    () (Research Department, Central Bank of Sweden)

  • Calcagno, Claudio

    (Department of Economics, European University Institute)

  • Le Quement, Mark

    (Department of Economics, University of Bonn)

Abstract

Both the academic literature and the policy debate on systematic bailout guarantees and Government subsidies have ignored an important effect: in industries where firms may go out of business due to idiosyncratic shocks, Governments may increase the likelihood of (tacit) coordination if they set up schemes that rescue failing firms. In a repeated-game setting, we show that a systematic bailout regime increases the expected profits from coordination and simultaneously raises the probability that competitors will remain in business and will thus be able to ’punish’ firms that deviate from coordinated behaviour. These effects make tacit coordination easier to sustain and have a detrimental impact on welfare. While the key insight holds across any industry, we study this question with an application to the banking sector, in light of the recent financial crisis and the extensive use of bailout schemes.

Suggested Citation

  • Bertsch, Christoph & Calcagno, Claudio & Le Quement, Mark, 2014. "Systematic bailout guarantees and tacit coordination," Working Paper Series 289, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0289
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    File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2014/rap_wp289_141117.pdf
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    References listed on IDEAS

    as
    1. Perotti, Enrico C. & Suarez, Javier, 2002. "Last bank standing: What do I gain if you fail?," European Economic Review, Elsevier, vol. 46(9), pages 1599-1622, October.
    2. Douglas Gale & Xavier Vives, 2002. "Dollarization, Bailouts, and the Stability of the Banking System," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 467-502.
    3. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, January.
    4. Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2011. "Competition, Risk-shifting, and Public Bail-out Policies," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2084-2120.
    5. Mouraviev, Igor & Rey, Patrick, 2011. "Collusion and leadership," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 705-717.
    6. 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.
    7. 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.
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    More about this item

    Keywords

    competition policy; systematic bailout guarantees; collusion; banking; State aid 2;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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