State ownership biases government support—evidence from the financial crisis

Abstract Do governments treat firms they own more generously than comparable firms they do not own? The allocation of stimulus funds to hospitals in Germany during the financial crisis provides a unique opportunity to address this question. Using an instrumental variable approach leveraging the historical persistence of hospital ownership, we find evidence that publicly owned hospitals received substantial preferential treatment from the government. These findings have important implications for industrial policy, providing an explanation for the existence of soft budget constraints often associated with publicly owned enterprises (JEL I18, L33, L53)