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Public inputs and the credit market

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  • Rajalaxmi Kamath

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    Abstract

    This paper studies the impact of public goods provision in an adverse selection environment. Public inputs used collectively by firms have indirect spillovers in imperfect credit markets by affecting the random returns of borrowers in this market. Public inputs change the nature of the binding incentive constraint and mitigate distortions in the credit market. The magnitude of such indirect benefits depends upon the ‘type’ of the public input being considered. Public inputs targeted to benefit the less-efficient borrowers in the economy have greater indirect benefits as compared to pure public inputs that benefit all. These additional efficiency gains, emerging out of information-asymmetries in the credit market, should be considered in the cost-benefit analysis of such public inputs. Copyright Springer Science + Business Media, LLC 2006

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    Bibliographic Info

    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 13 (2006)
    Issue (Month): 6 (November)
    Pages: 733-753

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    Handle: RePEc:kap:itaxpf:v:13:y:2006:i:6:p:733-753

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    Web page: http://www.springerlink.com/link.asp?id=102915

    Related research

    Keywords: Public inputs; Incentive-constraint; Credit-market; Modified Samuelson rule;

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