The Politician and his Banker

Hainz, Christa and Hakenes, Hendrik (November 2007): The Politician and his Banker. SFB/TR 15 Discussion Paper No. 222

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 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.

• Item Type: Paper (Discussion Paper)
• Keywords: public bank, development bank, state aid, subsidies, governance
• Collections: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B5 - Weltwirtschaftliche Integration und die neue Firmenorganisation; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B3 - Unternehmenskontrolle, Unternehmensfinanzierung und Effizienz
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: G21, G38, H25
• Language: English