Structuring Subsidies in a Long-Term Credit Relationship

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 relationsh...

Full description

Saved in:
Bibliographic Details
Published in:The B.E. journal of economic analysis & policy 2017-10, Vol.17 (4)
Main Author: Van Tassel, Eric
Format: Article
Language:English
Subjects:
Altruism
Bond markets
Credit
credit relationship
D86
Default
G21
Loans
Long term debt
O16
strategic default
Studies
Subsidies
subsidy
Citations: Items that this one cites
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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.
ISSN:2194-6108
1935-1682
DOI:10.1515/bejeap-2017-0028