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The Politician and his Banker

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Hakenes,  Hendrik
Max Planck Institute for Research on Collective Goods, Max Planck Society;

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Citation

Hainz, C., & Hakenes, H. (2008). The Politician and his Banker.


Cite as: http://hdl.handle.net/11858/00-001M-0000-0028-6E4A-9
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.