Effectiveness of bailouts in the EU

Ela Glowicka ()

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: Governments in the EU frequently bail out firms in distress by granting state aid. I use data from 86 cases during the years 1995-2003 to examine two issues: the effectiveness of bailouts in preventing bankruptcy and the determinants of bailout policy. The results are threefold. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. The number of failing bailouts could be reduced if European control was tougher. Second, governments’ bailout decisions favored state-owned firms, even though state-owned firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable in the analysis of the hazard rate. Treating it as exogenous underestimates its impact on the bankruptcy probability. Several policy implications of the results are discussed in the paper.

Keywords: State aid; European Union; Discrete-time hazard; Bivariate probit (search for similar items in EconPapers)
JEL-codes: G3 K2 L5 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-eec and nep-law
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Citations: View citations in EconPapers (3)

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