Choosing which firms to help in crisis: evidence from the emerging European economies

Abstract

Decisions over state assistance to firms can hinge on whether politicians choose a strategy that favors particular interest groups, targets aggregate economic performance, or both. Which types of firms are more likely to receive financial help from the government? While standard interest group based explanations tend to see special interests dominating the political process, extraordinary economic challenges, such as financial crises, may make general economic concerns a greater priority for politicians. We argue that during financial crisis, politicians – who are always concerned with the economy – are even more likely to prioritize broad economic growth over helping particular groups. Politicians should favor general economic strategies over helping specific groups of firms because they have limited resources and wish to avoid sending a bad signal to other firms about helping those that fail. Using 2010 World Bank firm-level surveys done in Bulgaria, Hungary, Latvia, Lithuania, Romania, and Turkey, we find that politicians favored small dynamic firms with a proven ability to use resources well rather than the largest employers, those firms with the greatest lobbying capacity, or firms in particular sectors. We optimistically conclude that interest groups with disproportionate resources will not always get special treatment at the expense of others.