A Study of Subsidy Policy in the Ship Financing Market

Abstract

This study considers the case in which governments decide whether to support private commercial banks with a subsidy policy in order to encourage participation in the international ship financing market. We examine two cases: (i) identical efficiency between domestic and foreign commercial banks; and (ii) different efficiencies between these banks. In the first case, the domestic government has the incentive to provide a subsidy strategy for domestic commercial banks to maximize social welfare, while the foreign government does not use the subsidy support. Furthermore, in the second case, foreign governments and commercial banks always prefer the subsidy strategy in order to maximize both social welfare and profits. However, the domestic government uses the subsidy strategy depending on the efficiency gap between the two banks. Our model suggests that governments need to support commercial banks with an appropriate subsidy strategy (direct or indirect) to promote participation in the market.