Abstract
This article analyzes one aspect of the trade-off between state aid and mergers faced by ailing firms when they want to avoid bankruptcy. It questions the existence of strategic aid made with the unique goal of influencing the competition authority’s beliefs regarding the competition. To analyze those aids, we create a model in which an authority is trying to deter strategic aid while being uninformed about competition. We show that when firms in difficulty know about the authority’s beliefs regarding competition, they implement strategic aid. The authority is able to deter them, but has to choose between deterring them and maximizing firms’ survival. When firms do not know the authority’s beliefs, strategic aid exists, and the authority is not able to minimize the percentage of aid. Nevertheless, the authority is efficient since simulations show that less than 1% of firms in difficulty are implementing strategic aid, thanks to this policy.
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