A Simple Model of Corporate Bailouts in a Globalized Economy

This paper explores how globalization influences the decision of governments to rescue inefficient domestic firms when bailouts affect firms' markups. We develop a model of international trade where immobile domestic enterprises (DOEs) compete with foreign enterprises (FOEs) in an oligopolistic market. The decision to bail out DOEs leads to lower corporate tax revenues if FOEs are immobile whereas tax revenues might increase if FOEs are mobile. Interestingly, the mobility of FOEs makes governments more prone to rescue ineffcient domestic firms because tax competition reduces the opportunity cost of a bailout policy in terms of public good provision.

Keywords: bailout of manufacturing firms, tax competition, trade costs, firm mobility

JEL Classification: F12, F15, D21, H25

Suggested Citation: Suggested Citation

Exbrayat, Nelly and Madiès, Thierry and Riou, Stephane, A Simple Model of Corporate Bailouts in a Globalized Economy (March 2019). GATE Working Paper Series 1913 - March 2019, Available at SSRN: https://ssrn.com/abstract=3360437 or http://dx.doi.org/10.2139/ssrn.3360437