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Market Power and the Transmission of Loan Subsidies

Author

Listed:
  • Jose Renato Haas Ornelas
  • Alvaro Pedraza
  • Claudia Ruiz-Ortega
  • Thiago Christiano Silva

Abstract

We study a large-scale Brazilian loan subsidy program to expand long-term credit. The government subsidizes banks’ funding costs for lenders, who then allocate credit to firms at regulated interest rates below a maximum ceiling. We propose and test a mechanism allowing banks to circumvent the rate caps and capture part of the subsidy. We show that when issuing a subsidized loan, lenders with market power use a cross-product pricing strategy, whereby they increase the price of other products to the same client. Our results have important policy implications for the design and effectiveness of government interventions in credit markets. (JEL G21, H81, E43)

Suggested Citation

  • Jose Renato Haas Ornelas & Alvaro Pedraza & Claudia Ruiz-Ortega & Thiago Christiano Silva, 2024. "Market Power and the Transmission of Loan Subsidies," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 13(4), pages 931-965.
  • Handle: RePEc:oup:rcorpf:v:13:y:2024:i:4:p:931-965.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfae015
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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