The politician and his banker — How to efficiently grant state aid

Christa Hainz and Hendrik Hakenes

Journal of Public Economics, 2012, vol. 96, issue 1, 218-225

Abstract: Politicians should spend money as efficiently as possible. But what is the best method of granting state aid to firms? We use a theoretical model with firms that differ in their success probabilities and compare different types of direct subsidies with indirect subsidies through bank loans. We find that, for a large range of parameters, subsidies through banks entail higher social welfare than direct subsidies, avoiding windfall gains to entrepreneurs and economizing on screening costs. For selfish politicians, subsidizing a bank has the additional advantage that part of the screening costs are born by private banks. Consequently, from a welfare perspective, politicians use subsidized banks inefficiently often.

Keywords: State aid; Subsidized banks; Public banks; Governance (search for similar items in EconPapers)
JEL-codes: G21 G38 H25 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (11)

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Working Paper: The Politician and his Banker – How to Efficiently Grant State Aid (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:96:y:2012:i:1:p:218-225

DOI: 10.1016/j.jpubeco.2011.09.005

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