The Politician and his Banker

Hendrik Hakenes and Christa Hainz

No 2008_01, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: Should the European Union grant state aid through an institution like the European Investment bank? This paper evaluates the efficiency of different measures for grant-ing state aid. We use a theoretical model with firms that differ in their creditworthiness and compare different types of subsidies with indirect subsidization through public banks. We find that, in a large parameter range, the politician prefers public banks to direct subsidies because they avoid windfall gains to entrepreneurs and they econo-mize on screening costs. For similar reasons, they may increase social welfare rela-tive to subsidies. One important prerequisite for this result is that public banks must not be allowed to fully compete with private banks. However, from a welfare perspec-tive, a politician uses public banks inefficiently often.

Keywords: property right; non-linear pricing; pure bundling; club good; cross-subsidisation; packet switched telephony (search for similar items in EconPapers)
JEL-codes: G21 G38 H25 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2008-01
New Economics Papers: this item is included in nep-ban and nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: The Politician and his Banker (2007)
Working Paper: The Politician and his Banker (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:mpg:wpaper:2008_1

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