We develop a theoretical model in which ﬁrms are either private or state-owned. When ﬁrms become insolvent, the government can intervene with general mea- sures, like subsidies, or by nationalizing ﬁrms. The government only intervenes when the bankruptcy of a ﬁrm entails social costs. In a stylized model, we an- alyze how government interventions aﬀect allocative and productive eﬃciency. Nationalization of private ﬁrms in case unproﬁtable investments were made, leads to increased allocative eﬃciency despite private ownership. The eﬀort level chosen by the managers working for ﬁrms is also aﬀected by government intervention with an impact on productive eﬃciency.
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