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Public Bank Guarantees and Allocative Efficiency

Updated version of IWH Discussion Paper 7/2015

59 Pages Posted: 23 Dec 2016 Last revised: 2 Nov 2017

Reint Gropp

Halle Institute for Economic Research

Andre Guettler

University of Ulm - Department of Mathematics and Economics; Halle Institute for Economic Research

Vahid Saadi

Fundación Instituto de Empresa, S.L. - IE Business School

Date Written: November 2, 2017

Abstract

We use a natural experiment and matched bank/firm data to identify the effects of bank guarantees on allocative efficiency. We find that with guarantees in place unproductive firms invest more and maintain higher rates of sales growth. Moreover, firms produce less productively. Firms also survive longer in banks’ portfolios and those that enter guaranteed banks’ portfolios are less productive. Finally, we observe fewer economy-wide firm exits and bankruptcy filings in the presence of guarantees. Overall, the results are consistent with the idea that guaranteed banks keep unproductive firms in business for too long and prevent their exit from the market.

Keywords: Banking, Bank Guarantees, Allocative Efficiency

JEL Classification: D22, D61, G21, G28, G31, G32

Suggested Citation

Gropp, Reint and Guettler, Andre and Saadi, Vahid, Public Bank Guarantees and Allocative Efficiency (November 2, 2017). Updated version of IWH Discussion Paper 7/2015. Available at SSRN: https://ssrn.com/abstract=2889304 or http://dx.doi.org/10.2139/ssrn.2889304

Reint Gropp

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Andre Guettler (Contact Author)

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Vahid Saadi

Fundación Instituto de Empresa, S.L. - IE Business School

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

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