The Politician and His Banker - How to Efficiently Grant State Aid

Ifo Working Paper No. 71

29 Pages Posted: 17 Jun 2009 Last revised: 4 Aug 2009

See all articles by Christa Hainz

Christa Hainz

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Hendrik Hakenes

University of Bonn - Economic Science Area

Date Written: May 17, 2009

Abstract

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

Keywords: State aid, subsidized loans, public bank, governance

JEL Classification: H25, G21, G38

Suggested Citation

Hainz, Christa and Hakenes, Hendrik, The Politician and His Banker - How to Efficiently Grant State Aid (May 17, 2009). Ifo Working Paper No. 71, Available at SSRN: https://ssrn.com/abstract=1421142 or http://dx.doi.org/10.2139/ssrn.1421142

Christa Hainz (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 81069
Germany

Hendrik Hakenes

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49-228-73-9225 (Phone)

HOME PAGE: http://www.finance.uni-bonn.de/hakenes

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