Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26938
Authors: 
Hainz, Christa
Hakenes, Hendrik
Year of Publication: 
2008
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods 2008,1
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.
Subjects: 
Public bank
development bank
state aid
subsidies
governance
JEL: 
G21
G38
H25
Document Type: 
Working Paper

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