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Credit Guarantees and Subsidies when Lender has a Market Power

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Abstract

Provision of credit guarantees or subsidies may remove an adverse selection leading to credit rationing. This paper concentrates on comparison of government budget costs of credit guarantees and subsidies in a monopolistic credit market. Di?erent opportunity costs among entrepreneurs, which re?ect di?erent mixes of general and human speci?c capital, generate di?erent outcomes in the model. As long as the participation costs of low-risk entrepreneurs are su?ciently close to the participation costs of high-risk entrepreneurs, the budget-cost minimizing government should prefer guarantees over interest rate subsidies as an intervention instrument.

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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 2011/18.

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Length: 33pages
Date of creation: Jun 2011
Date of revision: Jun 2011
Handle: RePEc:fau:wpaper:wp2011_18

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Keywords: credit; subsidies; guarantees;

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