Market Power and the Transmission of Loan Subsidies

Jose Ornelas, Alvaro Pedraza, Claudia Ruiz-Ortega and Thiago Silva ()

The Review of Corporate Finance Studies, 2024, vol. 13, issue 4, 931-965

Abstract: We study a large-scale Brazilian loan subsidy program to expand long-term credit. The government subsidizes banks’ funding costs for lenders, who then allocate credit to firms at regulated interest rates below a maximum ceiling. We propose and test a mechanism allowing banks to circumvent the rate caps and capture part of the subsidy. We show that when issuing a subsidized loan, lenders with market power use a cross-product pricing strategy, whereby they increase the price of other products to the same client. Our results have important policy implications for the design and effectiveness of government interventions in credit markets. (JEL G21, H81, E43)

Date: 2024
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