The Politician and his Banker – How to Efficiently Grant State Aid

Christa Hainz and Hendrik Hakenes ()

No Ifo Working Paper No. 71, Ifo Working Paper Series from Ifo Institute for Economic Research at the University of Munich

Abstract: In the current recession, politicians grant state aid of yet unknown dimensions. But whatis the most efficient measure for granting such aid? We use a theoretical model withfirms that differ in their creditworthiness and compare different types of direct subsidieswith indirectly subsidized loans. We find that, in a large parameter range, politiciansprefer subsidized loans to direct subsidies, because these avoid windfall gains to entrepreneurs,and they economize on screening costs. For similar reasons, subsidized loansmay increase social welfare relative to subsidies. From a welfare perspective, politiciansuse subsidized loans inefficiently often.

Keywords: State aid; subsidized loans; public bank; governance (search for similar items in EconPapers)
JEL-codes: G21 G38 H25 (search for similar items in EconPapers)
Date: 2009
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Journal Article: The politician and his banker — How to efficiently grant state aid (2012)
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