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Can Government Paternalism Prevent Credit Market Failure?

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  • Akhmedov Akhmed

  • Orlov Evgeniy

Abstract

This paper investigates how the possibility of government subsidies to firms affects lending and managerial incentives. We develop a model that shows that government support can perform as implicit insurer of firms, which leads to two main effects: lowering incen-tives of managers and increase of incentives to finance. The equilibrium with government intervention can be more efficient than one without intervention. We test the model predictions on Russian enterprise-level panel data for 1996-2000. Empirical evidence supports two predictions: 1) the probability that a firm gets external financing increases with increase of government’s care about firms survival; 2) firms with intermediate performance get subsidies.

Suggested Citation

  • Akhmedov Akhmed & Orlov Evgeniy, 2004. "Can Government Paternalism Prevent Credit Market Failure?," EERC Working Paper Series 04-02e, EERC Research Network, Russia and CIS.
    • Handle: RePEc:eer:wpalle:04-02e
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    Keywords

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    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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