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Bailout policy in a globalized economy

Author

Listed:
  • Nelly Exbrayat

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

  • Thierry Madiès

    (Université de Fribourg, Faculté des sciences économiques et sociales - Albert-Ludwigs-Universität Freiburg = University of Freiburg)

  • Stéphane Riou

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

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.

Suggested Citation

  • Nelly Exbrayat & Thierry Madiès & Stéphane Riou, 2014. "Bailout policy in a globalized economy," Working Papers halshs-00925006, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00925006
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00925006v1
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    References listed on IDEAS

    as
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    Keywords

    soft-budget constraint; tax competition; heterogenous firms; trade cost; location;
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