Public bank guarantees and allocative efficiency

Reint Gropp, Andre Guettler and Vahid Saadi

Journal of Monetary Economics, 2020, vol. 116, issue C, 53-69

Abstract: A natural experiment and matched bank/firm data are used to identify the effects of bank guarantees on allocative efficiency. We find that with guarantees in place unproductive firms receive larger loans, invest more, and maintain higher rates of sales and wage growth. Moreover, firms produce less productively. Firms also survive longer in banks’ portfolios and those that enter guaranteed banks’ portfolios are less profitable and productive. Finally, we observe fewer economy-wide firm exits and bankruptcy filings in the presence of guarantees. Overall, the results are consistent with the idea that guaranteed banks keep unproductive firms in business for too long.

Keywords: Banking; Bank guarantees; Allocative efficiency (search for similar items in EconPapers)
JEL-codes: D22 D61 G21 G28 G31 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:116:y:2020:i:c:p:53-69

DOI: 10.1016/j.jmoneco.2019.09.006

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