Systematic Bailout Guarantees and Tacit Coordination

Bertsch, Christoph, Calcagno, Claudio and Le Quement, Mark (2015) Systematic Bailout Guarantees and Tacit Coordination. The B.E. Journal of Economic Analysis & Policy, 15 (1). ISSN 1935-1682

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    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.

    Item Type: Article
    Uncontrolled Keywords: competition policy,systematic bailout guarantees,collusion,banking,state aid
    Faculty \ School: Faculty of Social Sciences > School of Economics
    Depositing User: Pure Connector
    Date Deposited: 12 Apr 2017 06:10
    Last Modified: 06 Nov 2018 15:45
    URI: https://ueaeprints.uea.ac.uk/id/eprint/63227
    DOI: 10.1515/bejeap-2014-0027

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