Entrepreneurship and Credit Constraints

Abstract

Abstract This chapter evaluates the introduction and expansion of a loan guarantee program in France in the mid-1990s. This indirect subsidy program provides (partial) insurance to banks against default risk when making loans to start-ups and small businesses that have low levels of collateral. The often-subsidized insurance premium is paid for the borrower but the screening and loan origination fulfill function by the banks. To maintain incentives for the banks, the government only insures part of the loans. Many countries, including the United States and the United Kingdom, have introduced versions of the loan guarantee schemes. The program is not free of all perverse effects. Greater access to the loan guarantee scheme seems to induce firms to take on riskier projects, which manifests itself in a higher likelihood of firms going bankrupt.

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