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Can Government Paternalism Prevent Credit Market Failure?

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  • Akhmedov Akhmed

    ()

  • Orlov Evgeniy

    ()

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    Abstract

    This paper investigates how the possibility of government subsidies to firms affects lending and managerial incentives. We develop a model that shows that government support can perform as implicit insurer of firms, which leads to two main effects: lowering incen-tives of managers and increase of incentives to finance. The equilibrium with government intervention can be more efficient than one without intervention. We test the model predictions on Russian enterprise-level panel data for 1996-2000. Empirical evidence supports two predictions: 1) the probability that a firm gets external financing increases with increase of government’s care about firms survival; 2) firms with intermediate performance get subsidies.

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    Bibliographic Info

    Paper provided by EERC Research Network, Russia and CIS in its series EERC Working Paper Series with number 04-02e.

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    Length: 31 pages
    Date of creation: 10 Jan 2004
    Date of revision:
    Handle: RePEc:eer:wpalle:04-02e

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    Postal: EERC Research Network, Russia and CIS, 13, Yakira Str., suite 332, Kyiv, 04119 Ukraine
    Phone: +38(044)492-8012
    Fax: +1(202)478-1968
    Web page: http://www.eerc.ru

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    Postal: EERC Research Network, Russia and CIS, 13, Yakira Str., suite 332, Kyiv, 04119 Ukraine
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    Web: https://eerc.ru/paper

    Related research

    Keywords: Russia; commitment problem; soft budget constraints; government; implicit insurance; selection models in panel data;

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