Bailout Policy in a Globalized Economy
33 Pages Posted: 8 Jan 2014
Date Written: January 7, 2014
Abstract
This paper explores how trade integration influences the decision by national governments to bailout manufacturing firms. We develop a 2-country model of generalized oligopoly with heterogenous firms and trade costs. High-cost firms are eligible for a bailout while low-cost firms are profitable. Our results show that trade liberalization influences both political benefits of a bailout and its relative cost as compared to a laissez-faire policy. If the fall in trade cost is so large that it allows high-cost firms to become exporters, governments might move away from a bailout policy to a laissez-faire policy. In contrast, a marginal decline in trade costs that does not affect the export status of high-cost firms, always makes governments more prone to adopt a bailout decision.
Keywords: soft-budget constraint, tax competition, heterogenous firms, trade cost, location
JEL Classification: F12, F15, D21, H25
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