Advanced Search
MyIDEAS: Login to save this article or follow this journal

Producer Subsidies And Adverse Selection In The Corporate Credit Market

Contents:

Author Info

  • Alexis Derviz
  • Narcisa Kadlčáková

Abstract

A model of loan negotiation between a bank and a firm is applied to a situation when the borrowing producer receives support from the government in the form of a sales or investment subsidy. A pre-condition of obtaining government support is the company's expenditure in the form of a lobby "contribution", financed by the producer revenue. The borrowed funds are invested in a new project. The project outcome is uncertain and can lead to a failure by the borrower to service the full amount of debt if the adverse state of nature is realized. The probability and other parameters of this "bankruptcy" outcome depend on the interest rate level and the producer characteristics, such as production costs and the productivity distribution. We consider the case when there are two types of these parameter values, corresponding to good and bad performers. It is shown that the possibility to buy government support affects the use of that part of the revenue which might be necessary to service the debt in adverse states of nature. One possible consequence is then a replacement of the equilibrium with zero bankruptcy probability with the one involving bankruptcy under unsuccessful project outcomes. Another is the possibility of a pooling equilibrium in which poor performers borrow at the same interest rate as good ones, instead of the separating equilibrium that favors good performers.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://ces.utia.cas.cz/bulletin/index.php/bulletin/article/view/107
Download Restriction: no

Bibliographic Info

Article provided by The Czech Econometric Society in its journal Bulletin of the Czech Econometric Society.

Volume (Year): 9 (2002)
Issue (Month): 15 ()
Pages:

as in new window
Handle: RePEc:czx:journl:v:9:y:2002:i:15:id:107

Contact details of provider:
Email:
Web page: http://ces.utia.cas.cz
More information through EDIRC

Related research

Keywords: risky investment; default; subsidy; signaling;

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:czx:journl:v:9:y:2002:i:15:id:107. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jozef Barunik).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.