 Banks vs. Firms: Who Benefits from Credit Guarantees?Sergio Mayordomo, Victoria Vanasco and Alberto Martin No 1389, Working Papers from Barcelona School of Economics Abstract: Governments often support private credit with guarantee schemes, compensating lenders for borrower defaults. Such schemes typically rely on banks to al- locate guarantees among borrowers, but how banks do so is not well understood. We study this in an economy where entrepreneurial effort, crucial for efficiency, is not contractible, creating a debt overhang problem. Credit guarantees can boost efficiency only if they lower repayment obligations, but their allocation by banks is subject to two distorsions. First, insofar as guarantees are scarce, banks extract rents from all allocated guarantees. Second, banks tilt the allocation of guarantees towards their less productive and highly-indebted borrowers, from whom they can extract even larger rents. As a result, the competitive equilibrium is inefficient. Our findings align with evidence from guarantees granted in Spain post-COVID. Keywords: Debt Overhang; credit guarantees; liquidations (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1389 Access Statistics for this paper More papers in Working Papers from Barcelona School of Economics Contact information at EDIRC. |
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