Public Initiatives to Support Entrepreneurs: Credit Guarantees versus Co-Funding

Stefan Arping, Gyöngyi Lóránth and Alan Morrison
Additional contact information
Gyöngyi Lóránth: Judge Business School, University of Cambridge
Alan Morrison: Said Business School, University of Oxford

No 09-019/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We analyze financial support for the entrepreneurial sector. State support can raise welfare by relaxing financial constraints, but it can also reduce lending standards if entrepreneurs substitute public sources of collateral for their own assets, if it encourages excessive entrepreneurial entry, or if it undermines bank monitoring incentives. We derive a “pecking order” for support schemes: support funds should be channeled first to credit guarantee schemes and then, when entrepreneurs start to substitute public for private collateral, to co-funding entrepreneurial projects. The optimal level of credit guarantee is diminishing in the costs of incentivising bank monitoring. We show in an extension that the long-term effect of public subsidies may be to impair the private sector’s initiative to uncover cost savings.

This discussion paper resulted in a publication in the Journal of Financial Stability , 2010, vol. 6, issue 1, pp. 26-35.

Keywords: Partial Credit Guarantees; Co-funding and Loan Subsidies; Private Sector Initiative; Lending Standards (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2009-02-24
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Journal Article: Public initiatives to support entrepreneurs: Credit guarantees versus co-funding (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20090019

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