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The Valuation of Government Loan Guarantees: a Theoretical and Empirical Perspective

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  • Samuel Mensah

    (University of Michigan-Flint)

Abstract

This study provides a model for the valuation of the benefits associated with government guarantee programs. The model generates the social value of a government loan guarantee under disequilibrium conditions that justify public investment as a second best decision rule. The social value of a loan is obtained by conditioning the benefits on the survival of the borrowing firm. An estimated hazard function captures the annual rate of benefit attrition resulting from the failure of borrowing firms. Benefit-cost indexes are generated by business class, thus providing ex ante asset allocation guidelines. Application of the model to a portfolio of loan guarantees administered by the Ontario Development Corporation indicates a positive social value under the assumed disequilibrium conditions.

Suggested Citation

  • Samuel Mensah, 1996. "The Valuation of Government Loan Guarantees: a Theoretical and Empirical Perspective," Public Finance Review, , vol. 24(2), pages 263-281, April.
    • Handle: RePEc:sae:pubfin:v:24:y:1996:i:2:p:263-281
    DOI: 10.1177/109114219602400208
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    References listed on IDEAS

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    1. Robert J. Brent, 1991. "The Cost-Benefit Analysis of Government Loams," Public Finance Review, , vol. 19(1), pages 43-66, January.
    2. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-679, June.
    3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    4. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-689, October.
    5. Selby, M J P & Franks, J R & Karki, J, 1988. "Loan Guarantees, Wealth Transfers and Incentives to Invest," Journal of Industrial Economics, Wiley Blackwell, vol. 37(1), pages 47-65, September.
    6. Marchand, Maurice & Mintz, Jack & Pestieau, Pierre, 1985. "Public production and shadow pricing in a model of disequilibrium in labour and capital markets," Journal of Economic Theory, Elsevier, vol. 36(2), pages 237-256, August.
    7. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
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    Cited by:

    1. Camino Blasco, David & Cardone Riportella, Clara, 1998. "The assessment of credit guarantee schemes for SME's: valuation and cost," DEE - Working Papers. Business Economics. WB 6535, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.

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