Which Government Interventions Are Good in Alleviating Credit Market Failures?

Karel Janda

No 2008/12, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: Credit contracting between a lender with a market power and a small start-up entrepreneur may lead to a rejection of projects whose expected benefits are higher than their total costs when an adverse selection is present. This inefficiency may be eliminated by a government support in the form of credit guarantees or subsidies. The principal-agent model of this paper compares different forms of government support and concludes that a guarantee defined as a proportion of a gross interest rate is not a sufficiently robust policy instrument. Lump-sum guarantees and interest rate subsidies are evaluated as better instruments because they have a nonambiguous positive effect on a social efficiency since they enable funding of socially efficient projects which would not be financed otherwise.

Keywords: information asymmetry; credit; guarantees; subsidies (search for similar items in EconPapers)
JEL-codes: D82 G18 H25 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2008-07, Revised 2008-07
New Economics Papers: this item is included in nep-cta and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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