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Which Government Interventions Are Good in Alleviating Credit Market Failures?

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Abstract

Credit contracting between a lender with a market power and a small start-up entrepreneur may lead to a rejection of projects whose expected benefits are higher than their total costs when an adverse selection is present. This inefficiency may be eliminated by a government support in the form of credit guarantees or subsidies. The principal-agent model of this paper compares different forms of government support and concludes that a guarantee defined as a proportion of a gross interest rate is not a sufficiently robust policy instrument. Lump-sum guarantees and interest rate subsidies are evaluated as better instruments because they have a nonambiguous positive effect on a social efficiency since they enable funding of socially efficient projects which would not be financed otherwise.

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Bibliographic Info

Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2008/12.

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Length: 38 pages
Date of creation: Jul 2008
Date of revision: Jul 2008
Handle: RePEc:fau:wpaper:wp2008_12

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Keywords: information asymmetry; credit; guarantees; subsidies;

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References

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Cited by:
  1. 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.

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