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Efficiency of Credit Allocation and Effectiveness of Government Credit Guarantees: Evidence from Japanese Small Businesses

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  • Uesugi, Iichiro

Abstract

This paper empirically examines the development of credit allocation amongst Japanese small- and medium-sized enterprises (SMEs), and the relationship between credit allocation and economic efficiency. We first investigate whether the credit market is inefficient, in that the survival of underperforming firms force better-performing firms to exit the market. Secondly, we test whether government credit guarantee programs are beneficial. In other words, do these programs increase the funds available to SMEs, and, more importantly, do they significantly impact the profitability of program users? Using a pair of unique firm-level datasets, we come to two major conclusions. (1) The selection mechanism in the Japanese credit market is efficiency-improving in that lower quality firms with higher borrowing costs are more likely to default. (2) The massive credit guarantee program implemented by the Japanese government in the late 1990s did result in the increased availability of funds to SMEs, and to the greater profitability of creditworthy firms. Moreover, interest rates do not decrease among program users indicating that government interest payment subsidies are not attributed fully to borrowers.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/15207/1/pie_dp353.pdf
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Bibliographic Info

Paper provided by Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University in its series PIE/CIS Discussion Paper with number 353.

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Length: 21 p.
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:hit:piecis:353

Note: January 31, 2008
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Cited by:
  1. Raphael W. Lam & Jongsoon Shin, 2012. "What Role Can Financial Policies Play in Revitalizing SMEs in Japan?," IMF Working Papers 12/291, International Monetary Fund.
  2. De Veirman, Emmanuel & Levin, Andrew T., 2012. "When did firms become more different? Time-varying firm-specific volatility in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(4), pages 578-601.
  3. 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.
  4. 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.

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