The Political Economy of Restructuring and Subsidisation: An International Perspective

In today’s increasingly competitive business environment, many …rms in declining industries have been confronted with the need to restructure. However, lobbies in these industries have often managed to attract government subsidies instead. This has led to a situation where …rms in declining sectors are often cross-subsidised by …rms in the growing sector of the economy by means of high taxes on the latter. The current paper looks at the decision whether to lobby for subsidies or to restructure a declining industry in the context of a contributions game where …rms in the declining industry lobby for subsidies, whereas …rms in the growing sector try to enforce a restructuring policy instead. The model endogenously derives the proportion of …rms in the declining industry that are restructured or subsidised, as well as the unit level at which restructuring or subsidisation takes place. In fact, this is a novel way of modeling soft budget constraints. Several results stand out. Firstly, even though in the absence of lobbying, subsidisation is always preferable to …rms in the declining industry, the cost of lobbying might outweigh the bene…t of subsidisation. Hence, it i