Government Loan Guarantees, Market Liquidity, and Lending Standards

Toni Ahnert and Martin Kuncl

Management Science, 2024, vol. 70, issue 7, 4502-4532

Abstract: We study third-party loan guarantees in a model in which lenders can screen and sell loans before maturity when in need of liquidity. Loan guarantees improve market liquidity, reduce lending standards, and can have a positive overall welfare effect. Guarantees improve the average quality of nonguaranteed loans traded and thus, the market liquidity of these loans because of selection. This positive pecuniary externality provides a rationale for guarantee subsidies. Our results contribute to a debate about reforming government-sponsored mortgage guarantees by Fannie Mae and Freddie Mac, suggesting that the excessively high subsidies to these guarantees should be reduced but not completely eliminated.

Keywords: mortgage guarantees; adverse selection; market liquidity; pecuniary externality; Pigouvian subsidy; government sponsored enterprises (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2022.01571 (application/pdf)

Related works:
Working Paper: Government Loan Guarantees, Market Liquidity, and Lending Standards (2022)
Working Paper: Government loan guarantees, market liquidity, and lending standards (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:7:p:4502-4532

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().