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Incrementality of SME Loan Guarantees

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  • Allan Riding

    ()

  • Judith Madill
  • George Haines
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    Abstract

    In many countries, loan guarantee programs are important elements of government policy with respect to small- and medium-sized enterprises (SMEs). If loan guarantee schemes are to be effective, a majority of firms obtaining assistance through such a scheme ought not to be able to obtain financing from existing sources: a property known as incrementality or additionality. This paper describes a new approach to measuring incrementality. This work uses a two-stage process to estimate the incrementality of loans made under the terms of the Canada Small Business Financing (CSBF) program. First, a logistic regression-based model of loan outcomes (essentially a credit-scoring model) is estimated based on a large representative sample of SMEs. The resulting model was consistent with prior expectations and exhibited high levels of goodness-of-fit. The model was then employed to classify a sample of firms that had received loans under the terms of the loan guarantee scheme. Incremental loans ought to be classified as “turndowns” by the model; hence the proportion of loan guarantee recipients that the model classified as turndowns is a direct measure of incrementality. For the CSBF loan guarantee program incrementality was estimated (with 95% confidence) as 74.8±9.0%. Copyright Springer 2007

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    File URL: http://hdl.handle.net/10.1007/s11187-005-4411-4
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    Bibliographic Info

    Article provided by Springer in its journal Small Business Economics.

    Volume (Year): 29 (2007)
    Issue (Month): 1 (June)
    Pages: 47-61

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    Handle: RePEc:kap:sbusec:v:29:y:2007:i:1:p:47-61

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    Web page: http://www.springerlink.com/link.asp?id=100338

    Related research

    Keywords: additionality; incrementality; small business; loan guarantees; G18; G28; M13; O17;

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    References

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    1. Riding, Allan L. & HainesJR., George, 2001. "Loan guarantees: Costs of default and benefits to small firms," Journal of Business Venturing, Elsevier, vol. 16(6), pages 595-612, November.
    2. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
    3. Cowling, Marc & Mitchell, Peter, 2003. " Is the Small Firms Loan Guarantee Scheme Hazardous for Banks or Helpful to Small Business?," Small Business Economics, Springer, vol. 21(1), pages 63-71, August.
    4. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
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    Cited by:
    1. Raquel Ortega-Argilés & Marco Vivarelli & Peter Voigt, 2009. "R&D in SMEs: a paradox?," Small Business Economics, Springer, vol. 33(1), pages 3-11, June.
    2. Patrick Honohan, 2008. "Partial Credit Guarantees: Principles and Practice," The Institute for International Integration Studies Discussion Paper Series iiisdp244, IIIS.
    3. ONO Arito & UESUGI Iichiro & YASUDA Yukihiro, 2011. "Are Lending Relationships Beneficial or Harmful for Public Credit Guarantees? Evidence from Japan's Emergency Credit Guarantee Program," Discussion papers 11035, Research Institute of Economy, Trade and Industry (RIETI).

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