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Effectiveness of Credit Guarantees in the Japanese Loan Market

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  • Iichiro Uesugi
  • Koji Sakai
  • Guy M. Yamashiro

Abstract

From 1998-2001, the Japanese government, in an effort to stimulate the flow of funds to the small business sector, implemented a massive credit guarantee program that was unprecedented in both scale and scope. Because the program was accessible by nearly every small firm we are able to clearly identify the policy effect. The program, therefore, presents a unique opportunity to determine if government intervention can improve the efficiency of credit allocation among bank-dependent small businesses. Utilizing a new panel data set of Japanese firms, which covers the implementation period of the program, we empirically test the theoretical predictions of Mankiw's (1986) adverse selection model. The model of credit markets under asymmetric information allows us to investigate whether government credit programs do more to stimulate small business investment, or serve to worsen the adverse selection problems prevalent in credit markets. We find evidence consistent with the former hypothesis. Specifically, we find that (1) program participants significantly increase their leverage, especially their use of long-term loans, and (2) with the exception of high-risk firms, become more efficient.

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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 06004.

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Length: 24 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:eti:dpaper:06004

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References

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  1. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, January.
  2. Ben R. Craig & William E. Jackson, III & James B. Thomson, 2005. "SBA-loan guarantees and local economic growth," Working Paper 0503, Federal Reserve Bank of Cleveland.
  3. Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December.
  4. Williamson, Stephen D, 1994. "Do Informational Frictions Justify Federal Credit Programs?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 523-44, August.
  5. William G. Gale, 1988. "Economic Effects of Federal Credit Programs," UCLA Economics Working Papers 483, UCLA Department of Economics.
  6. William G. Gale, 1989. "Collateral, Rationing, and Government Intervention in Credit Markets," NBER Working Papers 3024, National Bureau of Economic Research, Inc.
  7. 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.
  8. Wenli Li, 1998. "Government loan, guarantee, and grant programs: an evaluation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 25-52.
  9. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
  10. Varouj Aivazian & Dipak Mazumdar & Eric Santor, 2003. "Financial Constraints and Investment: Assessing the Impact of a World Bank Loan Program on Small and Medium-Sized Enterprises in Sri Lanka," Working Papers 03-37, Bank of Canada.
  11. Gale, William G., 1990. "Federal lending and the market for credit," Journal of Public Economics, Elsevier, vol. 42(2), pages 177-193, July.
  12. "Iwamoto, Yasushi", 2001. "Fiscal Investment and Loan Program―A Perspective on Government Interventions in the Japanese Financial Sector―," Economic Review, Hitotsubashi University, vol. 52(1), pages 2-15, January.
  13. Bruce D. Smith & Michael J. Stutzer, 1989. "Credit Rationing and Government Loan Programs: A Welfare Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 177-193.
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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Murtaza H. Syed & Jinsook Lee, 2010. "Japan’s Quest for Growth: Exploring the Role of Capital and Innovation," IMF Working Papers 10/294, International Monetary Fund.
  4. 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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