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Can Government Paternalism Prevent Credit Market Failure?

  • Akhmedov Akhmed


  • Orlov Evgeniy


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    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.

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    Paper provided by EERC Research Network, Russia and CIS in its series EERC Working Paper Series with number 04-02e.

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    Length: 31 pages
    Date of creation: 10 Jan 2004
    Date of revision:
    Handle: RePEc:eer:wpalle:04-02e
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    1. Gérard Roland, 2004. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 026268148x, December.
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    13. Charlier, E. & Melenberg, B. & van Soest, A.H.O., 1997. "An Analysis of Housing Expenditure Using Semiparametric Models and Panel Data," Discussion Paper 1997-14, Tilburg University, Center for Economic Research.
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    19. repec:adr:anecst:y:1999:i:55-56 is not listed on IDEAS
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