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A Study of the Effectiveness of Credit Subsidies: Evidence from a Panel of Italian Firms

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  • Grazia Rapisarda
  • Eleonora Patacchini
  • University of Southampton

Abstract

Credit subsidies in targeted industrial sectors or geographical areas are a primary mechanism of industrial and redistributive policy throughout the world. Using a unique panel of bank-firm relationships, we study the impact of interest-rate subsidies on the total amount of borrowing and on the average cost of borrowing for subsidised firms. Even though they seem to promote the rise of new bank firm relationships, subsidies have a relatively small effect on the total amount of borrowing when granted to existing clients. We also find evidence of a spillover effect of subsidies on non-subsidised interest rates, which is suggestive of possible rent-seeking activities undertaken by banks and their targeted borrowers. The size of the subsidy, the bank`s local market power, her informational advantage and the length of the bank-client relationship are found to be important determinants of the spillover effect.

Suggested Citation

  • Grazia Rapisarda & Eleonora Patacchini & University of Southampton, 2003. "A Study of the Effectiveness of Credit Subsidies: Evidence from a Panel of Italian Firms," Economics Series Working Papers 153, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:153
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    File URL: https://ora.ox.ac.uk/objects/uuid:6bc2f6af-fa25-4370-a7f0-c4af51d74198
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    References listed on IDEAS

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    Cited by:

    1. Tuan-Minh Dinh & Edmund Malesky & Trung-Thanh To & Duc-Thanh Nguyen, 2013. "Effect of Interest Rate Subsidies on Firm Performance and Investment Behavior during Economic Recession: Evidence from Vietnam," Asian Economic Journal, East Asian Economic Association, vol. 27(2), pages 185-207, June.
    2. Karel Janda, 2008. "Which Government Interventions Are Good in Alleviating Credit Market Failures?," Working Papers IES 2008/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2008.

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    More about this item

    Keywords

    funding gaps; credit subsidies; relationship lending; dynamic panel data models;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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