Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 289: Systematic bailout guarantees and tacit coordination
Christoph Bertsch (), Claudio Calcagno and Mark Le Quement
Additional contact information
Christoph Bertsch: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Claudio Calcagno: Department of Economics, European University Institute
Mark Le Quement: Department of Economics, University of Bonn
Abstract: Both the academic literature and the policy debate on systematic bailout guarantees and Government subsidies have ignored an important effect: in industries where firms may go out of business due to idiosyncratic shocks, Governments may increase the likelihood of (tacit) coordination if they set up schemes that rescue failing firms. In a repeated-game setting, we show that a systematic bailout regime increases the expected profits from coordination and simultaneously raises the probability that competitors will remain in business and will thus be able to ’punish’ firms that deviate from coordinated behaviour. These effects make tacit coordination easier to sustain and have a detrimental impact on welfare. While the key insight holds across any industry, we study this question with an application to the banking sector, in light of the recent financial crisis and the extensive use of bailout schemes.
Keywords: competition policy; systematic bailout guarantees; collusion; banking; State aid 2
49 pages, July 1, 2014
Full text files
rap_wp289_141117.pdf
Questions (including download problems) about the papers in this series should be directed to Lena Löfgren ()
Report other problems with accessing this service to Sune Karlsson ().
RePEc:hhs:rbnkwp:0289This page generated on 2024-09-13 22:16:57.