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
Date Written: November 2, 2017
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: Suggested Citation