Work

Loan Guarantees in a Democracy

Year: 2025

Type: article

Abstract: We study the political economy of loan guarantees within a credit-rationing framework. A government uses guarantees to decrease the borrowing cost, thus making more households incentive compatible. This shifts capital to productive projects (allocative effect). Backed by taxpayers, loan guarantees also shift consumption from nonborrowers to borrowers (redistributive effect). While a welfare-maximizing planner is only concerned about the allocative effect, vote-share-maximizing politicians are driven by the interaction of both effects. As a result, politicians may underprovide or overprovide guarantees compared to the welfare-maximizing solution, depending on the electoral setup, household risk aversion, income heterogeneity, and guarantees’ externalities. (JEL D72, G28)

Source: The Review of Corporate Finance Studies

DOI: 10.1093/rcfs/cfaf018

Authors: Stylianos Papageorgiou, Nicholas Ziros

Institution: University of Cyprus

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: hybrid

Estimated APC paid: $4,028