How state ownership biases government support
Schmidt, Tafti & Mang: "State ownership biases government support—evidence from the financial crisis" The Journal of Law, Economics, and Organization, 2026, Vol. 00
The question of whether government ownership leads to preferential treatment is a cornerstone of modern industrial policy. A recent study by Schmidt (LMU Munich), Tafti, and Mang provides empirical evidence that stat
e ownership significantly biases government support, even when legal frameworks demand neutrality. By analyzing the allocation of stimulus funds to German hospitals during the 2009 financial crisis, the researchers identified a systematic favoritism toward publicly owned facilities.
The researchers faced the significant challenge of distinguishing between simple correlation and causal bias. For instance, public hospitals might receive more aid simply because they are older or serve more disadvantaged populations. To resolve this, the authors employed an instrumental variable strategy using hospital ownership at the time of foundation, often dating back to the 19th or early 20th century, to instrument for ownership status in 2009. This historical approach allows them to control for unobserved variables, such as modern management quality, that might otherwise skew the results.
Their findings reveal that public hospitals which successfully applied for funds received approximately €700,000 more than comparable private facilities after accounting for size, regional demographics, and project types. Given an average total funding of € 1,300,000, this is a substantial amount. The disparity manifested differently across ownership models. For-profit hospitals were significantly less likely to receive any funding at all compared to their public counterparts. In contrast, not-for-profit hospitals were as likely as public ones to be approved for aid but received substantially less funding per project.
The study also explored the underlying mechanisms behind this favoritism. The data indicates that upcoming elections play a significant role. Preferential treatment was most acute in regions facing imminent elections, suggesting that politicians prioritize visible investments in public hospitals when they are more likely to be held accountable for their performance by the voting public. Notably, the researchers found that this bias is not primarily driven by political ideology; left-wing and right-wing officials both exhibited similar patterns of favoritism toward public entities.
These results provide a rigorous empirical explanation for the “soft budget constraint” often associated with state-owned enterprises. They suggest that state ownership can inadvertently distort competition and lead to an over-funding of public projects regardless of their objective merit. For scholars of industrial policy and journalists covering public finance, the study highlights that existing legal protections against preferential treatment may be insufficient to counteract the political incentives inherent in direct state ownership.
Link: State ownership biases government support—evidence from the financial crisis
