Do public subsidies reduce credit rationing? A matching approach

Public support to firms has been a traditional and important industrial policy measure in many countries for several decades. One of the reasons for public intervention is the existence of market failures or imperfections. Informational asymmetries between borrowers and lenders of funds in particular are used to justify subsidies to firms, especially small and medium-sized enterprises. Within this framework, the main purpose of public subsidies is offsetting market imperfections. Although there is a great deal of literature on the effect of state aid in Italy, there is no agreement on its effectiveness. See Bagella and Becchetti (1998), Bronzini and De Blasio (2006) and Adorno, Bernini and Pellegrini (2007). These papers and many others focus on the effects on productivity, debt ratio, profitability and employment, but no empirical studies so far have analyzed the impact of public subsidies on credit rationing. This paper therefore makes a contribution to current empirical literature by examining the effects of public funding on credit rationing of small and medium-sized Italian firms. The basic idea of the paper is that public subsidies affect firms’ ability to obtain more funds. This is because incentive has a positive effect on investments, which, in turn, act negatively on credit rationing through collateralization. The problem of self-selection arises in this analysis, because in public financing programs, firms are selected on the basis of common characteristics. So subsidized firms and unsubsidized firms cannot be considered random draws. In order to overcome this problem, I use a Propensity Score Matching model. My results suggest that public subsidies reduce the probability of a firm being credit rationing.