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Public Initiatives to Support Entrepreneurs: Credit Guarantees versus Co-Funding

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Author Info

  • Stefan Arping

    (Faculty of Economics & Business, University of Amsterdam)

  • Gy�ngyi L�r�nth

    (Judge Business School, University of Cambridge)

  • Alan Morrison

    (Said Business School, University of Oxford)

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. This discussion paper resulted in a publication in the Journal of Financial Stability : vol. 6, issue 1, pp. 26-35.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-019/2.

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Date of creation: 24 Feb 2009
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Handle: RePEc:dgr:uvatin:20090019

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Web page: http://www.tinbergen.nl

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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  1. Stephen D. Williamson, 1994. "Do informational frictions justify federal credit programs?," Proceedings, Federal Reserve Bank of Cleveland, pages 523-551.
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Citations

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Cited by:
  1. Beck, Thorsten & Klapper, Leora F. & Mendoza, Juan Carlos, 2008. "The typology of partial credit guarantee funds around the world," Policy Research Working Paper Series 4771, The World Bank.
  2. 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.
  3. Busetta, Giovanni & Zazzaro, Alberto, 2012. "Mutual loan-guarantee societies in monopolistic credit markets with adverse selection," Journal of Financial Stability, Elsevier, vol. 8(1), pages 15-24.
  4. 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.
  5. 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.
  6. 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).
  7. 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.
  8. Stefan Arping, 2013. "Proprietary Trading and the Real Economy," Tinbergen Institute Discussion Papers 13-032/IV/DSF52, Tinbergen Institute.
  9. 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.
  10. 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.

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