Structuring Subsidies in a Long-Term Credit Relationship

Eric Van Tassel ()
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Eric Van Tassel: Department of Economics, Florida Atlantic University, 777 Glades Rd.,Boca Raton, FL 33431, USA

The B.E. Journal of Economic Analysis & Policy, 2017, vol. 17, issue 4, 12

Abstract: We study a credit market using an infinite horizon model where an altruistic lender offers loans to agents for production projects that may grow over time. The lender funds the loans using a combination of external debt and subsidies. The optimal way for the lender to subsidize the credit relationships depends on the probability of project growth. When growth is less likely, it is best to commit to ongoing subsidies. However, for a range of growth probabilities, ongoing subsidization may not be credible and this can have negative efficiency implications.

Keywords: credit relationship; subsidy; strategic default (search for similar items in EconPapers)
JEL-codes: D86 G21 O16 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1515/bejeap-2017-0028

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