Bailout Policy in a Globalized Economy

33 Pages Posted: 8 Jan 2014

See all articles by Nelly Exbrayat

Nelly Exbrayat

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Thierry Madiès

University of Fribourg - Faculty of Economics and Social Science

Stephane Riou

GATE Lyon-Saint-Etienne

Date Written: January 7, 2014

Abstract

This paper explores how trade integration influences the decision by national governments to bailout manufacturing firms. We develop a 2-country model of generalized oligopoly with heterogenous firms and trade costs. High-cost firms are eligible for a bailout while low-cost firms are profitable. Our results show that trade liberalization influences both political benefits of a bailout and its relative cost as compared to a laissez-faire policy. If the fall in trade cost is so large that it allows high-cost firms to become exporters, governments might move away from a bailout policy to a laissez-faire policy. In contrast, a marginal decline in trade costs that does not affect the export status of high-cost firms, always makes governments more prone to adopt a bailout decision.

Keywords: soft-budget constraint, tax competition, heterogenous firms, trade cost, location

JEL Classification: F12, F15, D21, H25

Suggested Citation

Exbrayat, Nelly and Madiès, Thierry and Riou, Stephane, Bailout Policy in a Globalized Economy (January 7, 2014). Available at SSRN: https://ssrn.com/abstract=2375742 or http://dx.doi.org/10.2139/ssrn.2375742

Nelly Exbrayat (Contact Author)

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

Thierry Madiès

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland

Stephane Riou

GATE Lyon-Saint-Etienne ( email )

34, rue Francis Baulier
Saint-Etienne, 42023
France

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