Do Informational Frictions Justify Federal Credit Programs?

Stephen Williamson

Journal of Money, Credit and Banking, 1994, vol. 26, issue 3, 523-44

Abstract: Two credit market models with private information are used here to evaluate the effectiveness of government credit programs. In a model with costly state verification, direct government lending and government loan guarantees at best have no effect, and at worst make all agents worse off by increasing (decreasing) interest rates faced by borrowers (lenders) and increasing the amount of rationing in the loan market. In an adverse selection model with costly screening of borrowers, government lending influences credit allocation by affecting borrowers' incentives to misreport type. Government programs to encourage secondary markets in private loans are welfare improving only when there are regulations which inhibit diversification by private financial intermediaries. Copyright 1994 by Ohio State University Press.

Date: 1994
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