BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 12/2004:
The Political Economy of Restructuring and Subsidisation: An International Perspective
Greetje M.M. Everaert ()
Abstract: In today’s increasingly competitive business environment,
many firms in declining industries have been confronted with the need to
restructure. However, lobbies in these industries have often managed to
attract government subsidies instead. This paper looks at the decision of a
loss-making firm whether to lobby for subsidies or whether to restructure
in the context of a contributions game as in Magee et al. (1989). We
further analyse the role of tariffs in restricting uncompetitive practices
such as granting state aid to unprofitable firms. Several results stand
out. Firstly, there is a trade-off between spending resources on lobbying
for subsidies and costly restructuring such that both restructuring and
subsidisation take place in our model. Secondly, countervailing tariffs on
subsidised exports shift the decision in favour of restructuring, thereby
hardening budget constraints. Hence, the model illustrates that external
constraints such as countervailing tariffs can help to establish internal
financial discipline when first-best solutions are politically unfeasible.
Thirdly, the social planner always prefers full restructuring implying that
political com-petition comes at a cost of lower economic welfare in our
model.
Keywords: soft budget constraints; restructuring; political economy; lobbying; trade policy; declining industries; (follow links to similar papers)
JEL-Codes: F13; P26; (follow links to similar papers)
48 pages, June 17, 2004
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