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Public Initiatives to Support Entrepreneurs: Credit Guarantees versus Co-Funding

Author

Listed:
  • Stefan Arping

    (Faculty of Economics & Business, University of Amsterdam)

  • Gyöngyi Lóránth

    (Judge Business School, University of Cambridge)

  • Alan Morrison

    (Said Business School, University of Oxford)

Abstract

We analyze financial support for the entrepreneurial sector. State support can raise welfare by relaxing financial constraints, but it can also reduce lending standards if entrepreneurs substitute public sources of collateral for their own assets, if it encourages excessive entrepreneurial entry, or if it undermines bank monitoring incentives. We derive a “pecking order” for support schemes: support funds should be channeled first to credit guarantee schemes and then, when entrepreneurs start to substitute public for private collateral, to co-funding entrepreneurial projects. The optimal level of credit guarantee is diminishing in the costs of incentivising bank monitoring. We show in an extension that the long-term effect of public subsidies may be to impair the private sector’s initiative to uncover cost savings. This discussion paper resulted in a publication in the Journal of Financial Stability , 2010, vol. 6, issue 1, pp. 26-35.

Suggested Citation

  • Stefan Arping & Gyöngyi Lóránth & Alan Morrison, 2009. "Public Initiatives to Support Entrepreneurs: Credit Guarantees versus Co-Funding," Tinbergen Institute Discussion Papers 09-019/2, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20090019
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    References listed on IDEAS

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    More about this item

    Keywords

    Partial Credit Guarantees; Co-funding and Loan Subsidies; Private Sector Initiative; Lending Standards;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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