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Structuring Subsidies in a Long-Term Credit Relationship

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  • Van Tassel Eric

    (Department of Economics, Florida Atlantic University, 777 Glades Rd.,Boca Raton, FL 33431, USA)

Abstract

We study a credit market using an infinite horizon model where an altruistic lender offers loans to agents for production projects that may grow over time. The lender funds the loans using a combination of external debt and subsidies. The optimal way for the lender to subsidize the credit relationships depends on the probability of project growth. When growth is less likely, it is best to commit to ongoing subsidies. However, for a range of growth probabilities, ongoing subsidization may not be credible and this can have negative efficiency implications.

Suggested Citation

  • Van Tassel Eric, 2017. "Structuring Subsidies in a Long-Term Credit Relationship," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(4), pages 1-12, October.
    • Handle: RePEc:bpj:bejeap:v:17:y:2017:i:4:p:12:n:12
    DOI: 10.1515/bejeap-2017-0028
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    References listed on IDEAS

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    More about this item

    Keywords

    credit relationship; subsidy; strategic default;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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