State aid and competition policy
the case of bailouts in the European Union
Governments in the European Union bail out firms in distress by granting Rescue and Restructuring Subsidies. This thesis consists of three chapters analyzing European bailouts. In the first chapter, I use data from 86 cases during the years 1995-2003 to examine the effectiveness of bailouts in preventing bankruptcy. The results are threefold. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. Second, governments'' bailout decisions favored state-owned firms, even though state-owned firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable and treating it as exogenous underestimates its impact on the bankruptcy probability. Policy implications are discussed in the chapter. The second chapter is a study of the effects of bailouts on market structure and welfare in an international asymmetric Cournot duopoly. I show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional cost-reducing effort. When the exit is prevented, allocative and productive efficiencies are lower than in case of exit. The third chapter provides evidence of political, institutional and economic determinants of bailout policies. I use a new data set based on rescue and restructuring aid decisions during the years 1995-2003 merged with information about electoral outcomes in European countries. The main finding is that in countries with majoritarian democratic institutions bailouts are more likely, in particular during years preceding elections. Since bailouts are a targeted fiscal policy, the evidence supports the theory of Persson and Tabellini (2000) predicting that electoral systems shape incentives for fiscal policy choices.
School:Humboldt-Universität zu Berlin
Source Type:Master's Thesis
Keywords:QR 300 European Union Sarnierung Bailout State aid Competition policy Rescue and restructuring
Date of Publication:07/18/2008