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Do Informational Frictions Justify Federal Credit Programs?

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  • Williamson, Stephen D

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 Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 26 (1994)
Issue (Month): 3 (August)
Pages: 523-44

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Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:3:p:523-44

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. repec:dgr:uvatin:2009019 is not listed on IDEAS
  6. Arping, Stefan & Lóránth, Gyöngyi & Morrison, Alan D., 2010. "Public initiatives to support entrepreneurs: Credit guarantees versus co-funding," Journal of Financial Stability, Elsevier, vol. 6(1), pages 26-35, April.
  7. Alessandro Fedele & Andrea Mantovani & Francesco Liucci, 2010. "Credit Availability in the crisis: which role for the European Investment Bank Group?," Working Papers 1005, University of Brescia, Department of Economics.
  8. Uesugi, Iichiro & Sakai, Koji & Yamashiro, Guy M., 2010. "The Effectiveness of Public Credit Guarantees in the Japanese Loan Market," Journal of the Japanese and International Economies, Elsevier, vol. 24(4), pages 457-480, December.
  9. 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.
  10. 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).

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