Credit rationing, government credit programs and co-financingDona Rai
Journal of Applied Economics, 2007, vol. X, pages 361-389 Abstract: Costly monitoring may lead to credit rationing in equilibrium in an economy without any adverse selection or moral hazard problems. Given the widespread phenomenon of government intervention in credit markets in developing and developed countries, the natural question then is, How effective are these government programs? I incorporate government loan programs in a simple, closed, pure exchange economy with borrowing and lending. Intermediation of funds is facilitated in credit markets characterized by a costly state verification problem. I then show that government loan programs (financed with lump-sum taxes) with co-financing can increase credit rationing when the private lender is the prior claimant in the event of a default. Moreover such programs unambiguously decrease the expected utility of both borrowers and lenders. On the other hand, when the government is the prior claimant, such programs decrease credit rationing and increase the expected utility of borrowers. Finally, with proportional repayments there is no effect on credit rationing or expected utility of agents. Keywords: credit rationing; co-financing; lenders; borrowers; prior claimant (search for similar items in EconPapers) Downloads: (external link) Related works: Access Statistics for this article Journal of Applied Economics is edited by Germán Coloma and Mariana Conte Grand and Jorge M. Streb More articles in Journal of Applied Economics from Universidad del CEMA |
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