IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The Political Economy of Restructuring and Subsidisation: An International Perspective

  • Greetje Everaert

In today's increasingly competitive business environment, many firms in declining industries have been confronted with the need to restructure. However, lobbies in these industries have often managed to attract government subsidies instead. The current paper looks at the decision of loss-making firms whether to lobby for subsidies or whether to restructure in the context of a contributions game as in Magee et al. (1989). We also analyse the role of tariffs in restricting uncompetitive practices such as granting state aid to unprofitable firms. Several results stand out. Firstly, there is a trade-off between spending resources on lobbying for subsidies and costly restructuring such that both restructuring and subsidisation take place in our model. Secondly, countervailing tariffs on subsidised exports shift the decision in favour of restructuring, thereby hardening budget constraints. Thus, the model shows that external constraints such as countervailing tariffs can help to establish internal financial discipline. Thirdly, a social planner always prefers full restructuring implying that political competition comes at a cost of lower economic welfare in our model.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp130.pdf
Download Restriction: no

Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 13003.

as
in new window

Length: 43 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:lic:licosd:13003
Contact details of provider: Postal: De Bériotstraat 34, B-3000 Leuven
Phone: +32 (0) 16 / 32 6598
Fax: +32 (0) 16 / 32 6599
Web page: http://www.econ.kuleuven.be/licos
Email:


More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Brucker, Herbert & Schroder, Philipp J.H. & Weise, Christian, 2005. "Can EU conditionality remedy soft budget constraints in transition countries?," Journal of Comparative Economics, Elsevier, vol. 33(2), pages 371-386, June.
  2. Bertero, Elisabetta & Rondi, Laura, 2000. "Financial pressure and the behaviour of public enterprises under soft and hard budget constraints: evidence from Italian panel data," Journal of Public Economics, Elsevier, vol. 75(1), pages 73-98, January.
  3. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-62, December.
  4. Rodrik, Dani, 1995. "The Dynamics of Political Support for Reform in Economies in Transition," CEPR Discussion Papers 1115, C.E.P.R. Discussion Papers.
  5. Maggi, G. & Grossman, G., 1997. "Free Trade vs Strategic Trade: A Peek into Pandora's Box," Papers 190, Princeton, Woodrow Wilson School - Public and International Affairs.
  6. Paola Conconi & Carlo Perroni, 2003. "Self-Enforcing International Agreements and Domestic Policy Credibility," CESifo Working Paper Series 988, CESifo Group Munich.
  7. Schaffer, Mark E., 1989. "The credible-commitment problem in the center-enterprise relationship," Journal of Comparative Economics, Elsevier, vol. 13(3), pages 359-382, September.
  8. Collie, David, 1991. "Export subsidies and countervailing tariffs," Journal of International Economics, Elsevier, vol. 31(3-4), pages 309-324, November.
  9. Richard E. Baldwin & Frederic Robert-Nicoud, 2002. "Entry and Asymmetric Lobbying: Why Governments Pick Losers," NBER Working Papers 8756, National Bureau of Economic Research, Inc.
  10. Repkine, Alexandre & Walsh, Patrick Paul, 1999. "Evidence of European Trade and Investment U-Shaping Industrial Output in Bulgaria, Hungary, Poland, and Romania," Journal of Comparative Economics, Elsevier, vol. 27(4), pages 730-752, December.
  11. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "Learning-by-Exporting" Important? Micro-Dynamic Evidence from Colombia, Mexico and Morocco," NBER Working Papers 5715, National Bureau of Economic Research, Inc.
  12. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1995. "Options, the Value of Capital, and Investment," NBER Working Papers 5227, National Bureau of Economic Research, Inc.
  13. Castanheira, Micael & Roland, Gerard, 2000. "The Optimal Speed of Transition: A General Equilibrium Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 219-39, February.
  14. Mathias Dewatripont & Gérard Roland, 1996. "Transition as a process of large-scale institutional change," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(1), pages 1-30, 05.
  15. Dewatripont, Mathias & Roland, Gerard, 1995. "The Design of Reform Packages under Uncertainty," American Economic Review, American Economic Association, vol. 85(5), pages 1207-23, December.
  16. Miyagiwa, K. & Ohno, Y., 1993. "Closing the Technology Gap Under Protection," Discussion Papers in Economics at the University of Washington 93-09, Department of Economics at the University of Washington.
  17. Norbert Wunner, 1998. "Trade liberalization and political support in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 6(2), pages 409-425, November.
  18. David Austen-Smith, 1987. "Interest groups, campaign contributions, and probabilistic voting," Public Choice, Springer, vol. 54(2), pages 123-139, January.
  19. Chenggang Xu & Haizhou Huang, 1999. "Institutions, innovations, and Growth," IMF Working Papers 99/34, International Monetary Fund.
  20. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  21. Matsuyama, Kiminori, 1990. "Perfect Equilibria in a Trade Liberalization Game," American Economic Review, American Economic Association, vol. 80(3), pages 480-92, June.
  22. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
  23. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn.
  24. Meredith A. Crowley, 2002. "Do safeguard tariffs and antidumping duties open or close technology gaps?," Working Paper Series WP-02-13, Federal Reserve Bank of Chicago.
  25. Giovanni Maggi & Pinelopi Koujianou Goldberg, 1999. "Protection for Sale: An Empirical Investigation," American Economic Review, American Economic Association, vol. 89(5), pages 1135-1155, December.
  26. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 10, December.
  27. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  28. Gérard Roland, 2000. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182033, June.
  29. Janet Mitchell, 2000. "Theories of Soft Budget Constraints and the Analysis of Banking Crises," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 59-100, March.
  30. R. W. Staiger & G. Tabellini, 1999. "Do Gatt Rules Help Governments Make Domestic Commitments?," Economics and Politics, Wiley Blackwell, vol. 11(2), pages 109-144, 07.
  31. Acemoglu, Daron & Aghion, Philippe & Zilibotti, Fabrizio, 2002. "Distance to Frontier, Selection, and Economic Growth," CEPR Discussion Papers 3467, C.E.P.R. Discussion Papers.
  32. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  33. Brainard, S. Lael & Verdier, Thierry, 1997. "The political economy of declining industries: Senescent industry collapse revisited," Journal of International Economics, Elsevier, vol. 42(1-2), pages 221-237, February.
  34. Berglof, Erik & Roland, Gerard, 1997. "Soft budget constraints and credit crunches in financial transition," European Economic Review, Elsevier, vol. 41(3-5), pages 807-817, April.
  35. Qian, Yingyi & Xu, Chenggang, 1998. "Innovation and Bureaucracy under Soft and Hard Budget Constraints," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 151-64, January.
  36. repec:rus:hseeco:122439 is not listed on IDEAS
  37. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
  38. Cassing, James H & Hillman, Arye L, 1986. "Shifting Comparative Advantage and Senescent Industry Collapse," American Economic Review, American Economic Association, vol. 76(3), pages 516-23, June.
  39. Braillard, S. Lael & Verdier, Thierry, 1994. "Lobbying and adjustment in declining industries," European Economic Review, Elsevier, vol. 38(3-4), pages 586-595, April.
  40. Moore, Michael O. & Suranovic, Steven M., 1993. "Lobbying and Cournot-Nash competition : Implications for strategic trade policy," Journal of International Economics, Elsevier, vol. 35(3-4), pages 367-376, November.
  41. Greetje Everaert & Hylke Vandenbussche, 2001. "Does Protection Harden Budget Constraints?," LICOS Discussion Papers 9801, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  42. Schaffer, Mark E., 1998. "Do Firms in Transition Economies Have Soft Budget Constraints? A Reconsideration of Concepts and Evidence," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 80-103, March.
  43. Willmann, Gerald, 2003. "Why Legislators are Protectionists: the Role of Majoritarian Voting in Setting Tariffs," Economics Working Papers 2003,10, Christian-Albrechts-University of Kiel, Department of Economics.
  44. Hillman, Arye L. & Ursprung, Heinrich W., 1996. "The political economy of trade liberalization in the transition," European Economic Review, Elsevier, vol. 40(3-5), pages 783-794, April.
  45. Berglof, Erik & Roland, Gerard, 1998. "Soft Budget Constraints and Banking in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 18-40, March.
  46. Hillman, Arye L & Ursprung, Heinrich W, 1988. "Domestic Politics, Foreign Interests, and International Trade Policy," American Economic Review, American Economic Association, vol. 78(4), pages 719-45, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:lic:licosd:13003. 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: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.