NEGATIVE DEMAND SHOCKS, KNOCK-ON EFFECTS AND EMERGENCY GOVERNMENT BAILOUTS

In this paper we consider emergency government bailouts. We show that it is welfare‐enhancing to bail out failing firms that are facing a sudden negative demand shock and would otherwise go bankrupt, when there are sufficiently large fixed production costs and knock‐on effects (the negative external...

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Bibliographic Details
Published in:The Manchester school 2013-06, Vol.81 (3), p.243-257
Main Authors: CAI, DAPENG, LI, JIE
Format: Article
Language:English
Subjects:
Bailouts
Bankruptcy
Business failures
Demand shock
Firm theory
Government subsidies
Production costs
Studies
Subsidiary
Welfare state
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Summary:In this paper we consider emergency government bailouts. We show that it is welfare‐enhancing to bail out failing firms that are facing a sudden negative demand shock and would otherwise go bankrupt, when there are sufficiently large fixed production costs and knock‐on effects (the negative externalities produced by firms' failures that impact on other firms). We also suggest that subsidizing the whole industry at a uniform production subsidy generates a higher level of national welfare than merely subsidizing the failing firms.
ISSN:1463-6786
1467-9957
DOI:10.1111/j.1467-9957.2011.02279.x