Can Government Paternalism Prevent Credit Market Failure?

Akhmedov Akhmed () and Orlov Evgeniy ()

EERC Working Paper Series from EERC Research Network, Russia and CIS

Abstract: 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.

Keywords: Russia; commitment problem; soft budget constraints; government; implicit insurance; selection models in panel data (search for similar items in EconPapers)
JEL-codes: G34 G38 H81 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2004-01-10
New Economics Papers: this item is included in nep-cis, nep-pbe and nep-tra
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