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Can Government Paternalism Prevent Credit Market Failure?

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Author Info
Akhmedov Akhmed ()
Orlov Evgeniy ()
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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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
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Handle: RePEc:eer:wpalle:04-02e

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

Find related papers by JEL classification:
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans and Credits

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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    Other versions:
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