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Which Government Interventions Are Good in Alleviating Credit Market Failures?

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Author Info
Karel Janda () (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic, University of Economics, Prague)

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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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Publisher 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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Related research
Keywords: information asymmetry; credit; guarantees; subsidies;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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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