Consider the Export-Import Bank, a federal agency that assists U.S. firms in financing international transactions. A first-best efficient policy would be to eliminate the agency, on grounds that if private banks will not finance a transaction, then the transaction is not worthwhile. The government shouldn’t become the financier of otherwise unprofitable transactions.
Yet that’s not the whole story. The Foreign Corrupt Practices Act, for example, makes it illegal for U.S. businesses to pay bribes to foreign officials. But it is not always so easy to determine what is illegal, and companies may be penalized for normal business practices. It is certainly not cheap to comply. The Ex-Im Bank website says that “to avoid such consequences [of the FCPA], many firms have implemented detailed compliance programs intended to prevent and to detect any improper payments by employees and by third-party agents.”
This adds to the costs of U.S. firms doing business abroad, lowering the amount of legitimate trade. Maybe the Ex-Im Bank is a reasonable, second-best response. One government subsidy may be necessary to help overcome other inefficiencies imposed by the government to begin with.
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