Download Partial Credit Guarantees Discussions

Partial Credit Guarantees
Discussions
Quy-Toan Do (DECRG)
Summary of the papers
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Arping et al. (2008)
• Interplay of credit guarantees/cofunding in the standard insuranceagency 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
The canonical model
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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

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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.
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?

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Is PCG the best scheme in terms of efficiency and
targeting?
Reassessment of tradeoff, optimal contract
A “credit rationing” story?
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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)
A “risk-averse banks” story?
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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
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)