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Public initiatives to support entrepreneurs: Credit guarantees versus co-funding

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  • Arping, Stefan
  • Lóránth, Gyöngyi
  • Morrison, Alan D.

Abstract

We analyze financial support for the entrepreneurial sector. State support can raise welfare by relaxing financial constraints, but it can also reduce lending standards if entrepreneurs substitute public sources of collateral for their own assets, if it encourages excessive entrepreneurial entry, or if it undermines bank monitoring incentives. We derive a "pecking order" for support schemes: support funds should be channeled first to credit guarantee schemes and then, when entrepreneurs start to substitute public for private collateral, to co-funding entrepreneurial projects. The optimal level of credit guarantee is diminishing in the costs of incentivising bank monitoring. We show in an extension that the long-term effect of public subsidies may be to impair the private sector's initiative to uncover cost savings.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 6 (2010)
Issue (Month): 1 (April)
Pages: 26-35

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Handle: RePEc:eee:finsta:v:6:y:2010:i:1:p:26-35

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Web page: http://www.elsevier.com/locate/jfstabil

Related research

Keywords: Partial credit guarantees Co-funding and loan subsidies Private sector initiative Lending standards;

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References

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Citations

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Cited by:
  1. A. Fedele & A. Mantovani & F. Liucci, 2010. "Credit availability in the crisis: which role for the European Investment Bank Group?," Working Papers 699, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Beck, Thorsten & Klapper, Leora F. & Mendoza, Juan Carlos, 2010. "The typology of partial credit guarantee funds around the world," Journal of Financial Stability, Elsevier, vol. 6(1), pages 10-25, April.
  3. Karel Janda, 2011. "Credit Rationing and Public Support of Commercial Credit," CERGE-EI Working Papers wp436, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  4. Karel Janda, 2008. "Which Government Interventions Are Good in Alleviating Credit Market Failures?," Working Papers IES 2008/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2008.
  5. Raphael W. Lam & Jongsoon Shin, 2012. "What Role Can Financial Policies Play in Revitalizing SMEs in Japan?," IMF Working Papers 12/291, International Monetary Fund.
  6. Giovanni Busetta & Alberto Zazzaro, 2009. "Mutual Loan-Guarantee Societies in Monopolistic Credit Markets with Adverse Selection," Mo.Fi.R. Working Papers 33, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  7. Heshmati, Almas, 2013. "The Effect of Credit Guarantees on R&D Investment of SMEs in Korea," IZA Discussion Papers 7851, Institute for the Study of Labor (IZA).
  8. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2011. "Risk absorption by the state: when is it good public policy ?," Policy Research Working Paper Series 5893, The World Bank.
  9. Karel Janda, 2011. "Credit Guarantees and Subsidies when Lender has a Market Power," Working Papers IES 2011/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2011.
  10. Stefan Arping, 2013. "Proprietary Trading and the Real Economy," Tinbergen Institute Discussion Papers 13-032/IV/DSF52, Tinbergen Institute.

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