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Public Bank Guarantees and Allocative Efficiency

IWH Discussion Paper 7/2015

58 Pages Posted: 23 Dec 2016  

Reint Gropp

Halle Institute for Economic Research

Andre Guettler

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

Vahid Saadi

Goethe University Frankfurt - House of Finance; Halle Institute for Economic Research

Date Written: June 2015

Abstract

We take advantage of a natural experiment and matched bank/firm data to identify the effects of public guarantees on allocative efficiency. We find that with guarantees in place inefficient firms invest more and maintain higher rates of sales growth. Moreover, firms produce less efficiently. Also, firms survive longer in banks’ portfolios and firms that enter guaranteed banks’ portfolios are less efficient. At the sectoral level we observe lower firm exit rates and bankruptcies. Overall, the results are consistent with the idea that guaranteed banks keep inefficient firms in business for too long and prevent their exit from the market.

Keywords: Banking, Public 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 (June 2015). 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

Goethe University Frankfurt - House of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Halle Institute for Economic Research

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

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