Systematic bailout guarantees and tacit coordination

Christoph Bertsch, Claudio Calcagno and Mark Le Quement
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Claudio Calcagno: Department of Economics, European University Institute
Mark Le Quement: Department of Economics, University of Bonn

No 289, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

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.

Keywords: competition policy; systematic bailout guarantees; collusion; banking; State aid 2 (search for similar items in EconPapers)
JEL-codes: D43 G21 K21 L41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2014-07-01
New Economics Papers: this item is included in nep-bec, nep-com, nep-pr~ and nep-mkt
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http://www.riksbank.se/Documents/Rapporter/Working ... rap_wp289_141117.pdf (application/pdf)

Related works:
Journal Article: Systematic Bailout Guarantees and Tacit Coordination (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0289

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