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Partial Credit Guarantees Discussions

Partial Credit Guarantees Discussions. Quy-Toan Do (DECRG). Summary of the papers. Arping et al. (2008) Interplay of credit guarantees/co-funding in the standard insurance-agency tradeoff Propose an optimal contract Benavides and Huidobro (2008)

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Partial Credit Guarantees Discussions

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  1. Partial Credit GuaranteesDiscussions Quy-Toan Do (DECRG)

  2. Summary of the papers • Arping et al. (2008) • Interplay of credit guarantees/co-funding in the standard insurance-agency tradeoff • Propose an optimal contract • Benavides and Huidobro (2008) • Credit guarantees when private lenders are risk-averse • Structural estimation of optimal level of credit guarantee

  3. The canonical model • A tension between agency and insurance • The model: • A project has stochastic returns • Entrepreneur can exert effort to increase probability of success • Need to reward effort by giving prize if project succeeds: because of limited liability, there is a cap on interest rates; possibility of credit rationing • Thus: a low return confounds bad luck and lack of effort • How severely to punish the entrepreneur if a low return is realized? Tradeoff between punishing bad behavior and unlucky outcome.

  4. Remaining questions • Why government-sponsored schemes? • Credit rationing? • Arping et al. (2008) • What is the government comparative advantage? • Private lenders are risk-averse? • Benavides and Huidobro (2008) • Why not securitization? • Externalities? • Is PCG the best scheme in terms of efficiency and targeting? • Reassessment of tradeoff, optimal contract

  5. A “credit rationing” story? • Arping et al. (2008): existence of institution is taken as given • What is the comparative advantage of the government or any institution to provide this service? • In moral hazard case: co-funding always the optimal solution (pure subsidy)

  6. A “risk-averse banks” story? • Benavides and Huidobro (2008) • Why is a government agency better insurer of banks than the private market? • Moral hazard – Insurance tradeoff is now moved to the contract between private banks and the government agency • In the long-run, whether government-backed guarantee is targeted to lenders or borrowers is irrelevant

  7. Externality • One avenue for further research: some firms generate large spillovers not internalized by private investors • Employment (social stability – consumption – votes) • Environment • How does the government intervention affects the agency-insurance tradeoff? • Tradeoff between targeting and distortion (moral hazard – adverse selection)

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