IDEAS home Printed from https://ideas.repec.org/a/bla/reesec/v17y1989i2p177-193.html
   My bibliography  Save this article

Credit Rationing and Government Loan Programs: A Welfare Analysis

Author

Listed:
  • Bruce D. Smith
  • Michael J. Stutzer

Abstract

Asymmetric information about borrower default probabilities may lead to inefficient credit rationing of low‐risk borrowers in otherwise competitive markets. In a simple model having these properties, we show that some types of government loan programs, such as loan guarantees issued through lenders, might improve economic efficiency. But the incentive for high‐risk borrowers to misrepresent their loan quality is worsened by other government loan programs, notably those that try to target aid directly to rationed borrowers. As such, cost‐effective programs may increase inefficiency. This surprising result highlights the need to conduct model‐specific policy analyses, as opposed to analyses based on model‐free performance indicators.

Suggested Citation

  • Bruce D. Smith & Michael J. Stutzer, 1989. "Credit Rationing and Government Loan Programs: A Welfare Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 177-193, June.
    • Handle: RePEc:bla:reesec:v:17:y:1989:i:2:p:177-193
    DOI: 10.1111/1540-6229.00483
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1540-6229.00483
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1540-6229.00483?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Gale, William G, 1991. "Economic Effects of Federal Credit Programs," American Economic Review, American Economic Association, vol. 81(1), pages 133-152, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Federico Huneeus & Joseph Kaboski & Mauricio Larrain & Sergio Schmukler & Mario Vera, 2022. "The Distribution of Crisis Credit: Effects on Firm Indebtedness and Aggregate Risk," Working Papers Central Bank of Chile 942, Central Bank of Chile.
    2. Charles A.E. Goodhart & Dimitrios P. Tsomocos & Xuan Wang, 2023. "Support for small businesses amid COVID‐19," Economica, London School of Economics and Political Science, vol. 90(358), pages 612-652, April.
    3. Wenli Li, 1998. "Government loan, guarantee, and grant programs: an evaluation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 25-52.
    4. Neyer, Ulrike, 2004. "Asymmetric information in credit markets--implications for the transition in Eastern Germany," Economic Systems, Elsevier, vol. 28(1), pages 61-78, March.
    5. Bachas, Natalie & Kim, Olivia S. & Yannelis, Constantine, 2021. "Loan guarantees and credit supply," Journal of Financial Economics, Elsevier, vol. 139(3), pages 872-894.
    6. Jeffrey M. Lacker, 1991. "Why is there debt?," Economic Review, Federal Reserve Bank of Richmond, vol. 77(Jul), pages 3-19.
    7. Deborah Lucas & Damien Moore, 2007. "Guaranteed Versus Direct Lending: The Case of Student Loans: Working Paper 2007-09," Working Papers 18759, Congressional Budget Office.
    8. Granja, João & Makridis, Christos & Yannelis, Constantine & Zwick, Eric, 2022. "Did the paycheck protection program hit the target?," Journal of Financial Economics, Elsevier, vol. 145(3), pages 725-761.
    9. Lensink, Robert & Sterken, Elmer, 2001. "Asymmetric information, option to wait to invest and the optimal level of investment," Journal of Public Economics, Elsevier, vol. 79(2), pages 365-374, February.
    10. Karel Janda, 2003. "Credit guarantees in a credit market with adverse selection," Prague Economic Papers, Prague University of Economics and Business, vol. 2003(4), pages 331-349.
    11. Ma, Chien-Hui & Smith, Bruce D., 1996. "Credit market imperfections and economic development: Theory and evidence," Journal of Development Economics, Elsevier, vol. 48(2), pages 351-387, March.
    12. Arvind Ashta & Laurence Attuel-Mendès & Zaka Ratsimalahelo, 2015. "Another “French paradox”: explaining why interest rates to microenterprises did not increase with the change in French usury legislation," European Journal of Law and Economics, Springer, vol. 40(3), pages 479-509, December.
    13. Schreiner, Mark, 1997. "Ways Donors Can Help The Evolution Of Sustainable Microfinance Organizations," Economics and Sociology Occasional Papers - ESO Series 28327, Ohio State University, Department of Agricultural, Environmental and Development Economics.
    14. William G. Gale, 1990. "The Hybrid Plan: A Proposal For Federal Credit Reform," Contemporary Economic Policy, Western Economic Association International, vol. 8(2), pages 107-121, April.
    15. António Antunes & Tiago Cavalcanti & Anne Villamil, 2015. "The effects of credit subsidies on development," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(1), pages 1-30, January.
    16. Deborah Lucas & Damien Moore, 2007. "The Student Loan Consolidation Option: An Analysis of an Exotic Financial Derivative: Working Paper 2007-05," Working Papers 18540, Congressional Budget Office.
    17. Honohan, Patrick, 2010. "Partial credit guarantees: Principles and practice," Journal of Financial Stability, Elsevier, vol. 6(1), pages 1-9, April.
    18. Mark Schreiner & Jacob Yaron, 2001. "Development Finance Institutions : Measuring Their Subsidy," World Bank Publications - Books, The World Bank Group, number 13983.
    19. Iichiro Uesugi, 2008. "Efficiency of Credit Allocation and Effectiveness of Government Credit Guarantees: Evidence from Japanese Small Businesses," Bank of Japan Working Paper Series 08-E-2, Bank of Japan.
    20. Lucas, Deborah & Moore, Damien, 2019. "The student loan consolidation option," Journal of Public Economics, Elsevier, vol. 174(C), pages 1-12.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:reesec:v:17:y:1989:i:2:p:177-193. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/areueea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.