The Politician and his Banker

Arbeitspapier

Should the European Union grant state aid through an institution like the European Investment bank? This paper evaluates the efficiency of different measures for granting 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 economize on screening costs. For similar reasons, they may increase social welfare relative 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 perspective, a politician uses public banks inefficiently often.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB/TR 15 Discussion Paper ; No. 222

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Corporate Finance and Governance: Government Policy and Regulation ; Business Taxes and Subsidies including sales and value-added (VAT)
• Subject: public bank ; development bank ; state aid ; subsidies ; governance

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hainz, Christa ; Hakenes, Hendrik
• Event: Veröffentlichung
• (who): Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY)
• (where): München
• (when): 2007

Further information

• DOI: doi:10.5282/ubm/epub.13330
• Handle: http://hdl.handle.net/10419/93978
• URN: urn:nbn:de:bvb:19-epub-13330-2
• Last update: 10.03.2025, 11:41 AM CET