Public Development Banks and Credit Market Imperfections

46 Pages Posted: 3 Feb 2016 Last revised: 19 Sep 2018

See all articles by Marcela Eslava

Marcela Eslava

University of the Andes (CEDE)

Xavier Freixas

Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR); Barcelona Graduate School of Economics (Barcelona GSE)

Multiple version iconThere are 3 versions of this paper

Date Written: September 19, 2018


Which projects/firms should be the target of lending by a Public Development Bank (PDB)? What is the optimal design for the PDB's loans, and the optimal structure for delivering them? We analyze these questions in the context of a model where screening is costly to banks and underprovision of credit results from the inability of banks to appropriate the full benefits of projects they finance, more pronounced for high value projects. PDB intervention arises as a natural alternative to alleviate this inefficiency, since it originates in a failure in the private provision of credit. Lending to commercial banks at subsidized rates or providing credit guarantees, targeting the firms that generate high added value, are valid policy alternatives. Though in normal times PDB lending and credit guarantees are shown to be equivalent, lending is preferred when banks are facing a liquidity shortage, while a credit guarantees program is preferred when banks are undercapitalized. Direct lending by the PDB to the targeted industries could be superior to these subsidies to private lending, but only if the PDB's corporate governance is strong enough for public credit to respond to efficiency considerations rather than political concerns. PDB intervention naturally addresses credit underprovision stemming from failures directly affecting financial institutions, but it can also alleviate that arising from firm's moral hazard or insufficient access to collateral.

Keywords: Public development banks; governmental loans and guarantees; costly screening; credit rationing.

JEL Classification: H81, G20, G21, G23

Suggested Citation

Eslava, Marcela and Freixas, Xavier, Public Development Banks and Credit Market Imperfections (September 19, 2018). Documento CEDE No. 2016-06, Available at SSRN: or

Marcela Eslava (Contact Author)

University of the Andes (CEDE) ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976

Xavier Freixas

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
+34 93 542 2726 (Phone)
+34 93 542 1746 (Fax)


Centre for Economic Policy Research (CEPR) ( email )

United Kingdom


Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005

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