Optimum pricing of mutual guarantees for credit

Yoram Kroll () and Assaf Cohen

Small Business Economics, 2013, vol. 41, issue 1, 253-262

Abstract: The main finding of this paper is that under financial market impediments and asymmetric information, a mutually guaranteed and correctly schemed and priced insurance credit contract should have an abnormal actuarial profit. Such a contract improves welfare by simultaneously eliminating underinvestment (UI) and overinvestment (OI) and by reducing the probability of the insurer’s ruin. This solution is relevant for mutual credit insurance agencies and international or governmental agencies interested in increasing the value creation of small and medium enterprises that suffer from limited access to equity and debt markets. Copyright Springer Science+Business Media, LLC. 2013

Keywords: Credit insurance; Mutual guarantees; Moral hazard; Asymmetric information; SME; Underinvestment (UI); Overinvestment (OI); G21; G22; G32; L26 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11187-012-9430-3

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