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Do informational frictions justify federal credit programs?

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  • Stephen D. Williamson

Abstract

Two credit market models with private information are used here to evaluate the effectiveness of government credit programs. In a model with costly state verification, direct government lending and government loan guarantees at best have no effect, and at worst make all agents worse off by increasing (decreasing) interest rates faced by borrowers (lenders) and increasing the amount of rationing in the loan market. In an adverse selection model with costly screening of borrowers, government lending influences credit allocation by affecting borrowers' incentives to misreport type. Government programs to encourage secondary markets in private loans are welfare improving only when there are regulations which inhibit diversification by private financial intermediaries. Copyright 1994 by Ohio State University Press.

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Bibliographic Info

Article provided by Federal Reserve Bank of Cleveland in its journal Proceedings.

Volume (Year): (1994)
Issue (Month): ()
Pages: 523-551

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Handle: RePEc:fip:fedcpr:y:1994:p:523-551

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Keywords: Credit - United States ; Government lending - United States ; Loans - United States;

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Cited by:
  1. Uesugi, Iichiro & Sakai, Koji & Yamashiro, Guy M., 2008. "The Effectiveness of Public Credit Guarantees in the Japanese Loan Market," PIE/CIS Discussion Paper 400, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  2. Coad, Alex, 2010. "Neoclassical vs evolutionary theories of financial constraints: Critique and prospectus," Structural Change and Economic Dynamics, Elsevier, vol. 21(3), pages 206-218, August.
  3. 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.
  4. 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.
  5. Stefan Arping & Gy�ngyi L�r�nth & Alan Morrison, 2009. "Public Initiatives to Support Entrepreneurs: Credit Guarantees versus Co-Funding," Tinbergen Institute Discussion Papers 09-019/2, Tinbergen Institute.
  6. 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.
  7. Iichiro Uesugi & Koji Sakai & Guy M. Yamashiro, 2006. "Effectiveness of Credit Guarantees in the Japanese Loan Market," Discussion papers 06004, Research Institute of Economy, Trade and Industry (RIETI).
  8. Joseph G. Haubrich & James B. Thomson, 1994. "A conference on federal credit allocation," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-13.
  9. Jeffrey M. Lacker, 1994. "Does adverse selection justify government intervention in loan markets?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 61-95.
  10. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2014. "Risk-bearing by the state: When is it good public policy?," Journal of Financial Stability, Elsevier, vol. 10(C), pages 76-86.
  11. Stefan Arping & Gy�ngyi L�r�nth & Alan Morrison, 2009. "Public Initiatives to Support Entrepreneurs: Credit Guarantees versus Co-Funding," Tinbergen Institute Discussion Papers 09-019/2, Tinbergen Institute.

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