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Tobias Hentze IW-Policy Paper No. 27 7. December 2020 On the Design of the Corona Aid in 2021

In view of the partially existence-threatening consequences resulting from the partial shutdown due to the Corona crisis, the Federal Government was and is under pressure to act. The need for simple and effective help is unquestionable, because it helps to maintain economic structures.

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On the Design of the Corona Aid in 2021
Tobias Hentze IW-Policy Paper No. 27 7. December 2020

On the Design of the Corona Aid in 2021

IW-Policy Paper

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In view of the partially existence-threatening consequences resulting from the partial shutdown due to the Corona crisis, the Federal Government was and is under pressure to act. The need for simple and effective help is unquestionable, because it helps to maintain economic structures.

In this respect, the November and December aid is understandable, especially since it supports sectors that have already suffered severely from the crisis in the past month.
 
Nonetheless, flat-rate reimbursements of sales lead to distortions between companies. In order to avoid losses for companies with high fixed costs, a high reimbursement rate is required, which inevitably goes hand in hand with scatter effects. Bases on the information provided by the Federal Ministry of Finance, these scatter effects amount to a total of almost 9 billion euros in November and December 2020.
 
For the year 2021 aid programs should be established based on the triad “simple, accurate, incentive-oriented”. The “bridging aid III”, which is based on fixed costs, is a step in the right direction against this background. However, it excludes the situation of companies being closed as in November and December 2020. In this case, a "fixed-cost plus model" should be offered to companies affected by the crisis. Only large fixed cost components, such as rent, interest and insurances, should be reimbursed, provided with an additional risk premium. This risk premium should primarily serve to cover other smaller blocks of fixed costs, but can also represent a partial profit. The approach would be accurate, since in any case losses are avoided without causing distortions. The approach would be incentive-oriented, because a pure fixed cost reimbursement is not sustainable for a company in the long term. At the same time, there are no misleading incentives with regard to layoffs.

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On the Design of the Corona Aid in 2021
Tobias Hentze IW-Policy Paper No. 27 7. December 2020

Tobias Hentze: Zur Ausgestaltung der Corona-Hilfen im Jahr 2021

IW-Policy Paper

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