A Market-Based Alternative to Support Small Businesses Amid COVID-19 Lockdowns Using Dinner Bonds

Abstract

Lockdown measures to contain COVID-19 put a strain on firms’ liquidity. To support their cash flow some businesses issued dinner bonds to their clients, priced at a discount, redeemable when safe distance restrictions end. These contracts derived their value from a binary variable, in this case, being in-business post-lockdown, and bear significant associated problems. For instance, the value gained by customers with the advance purchase goes to zero if the business goes bankrupt. There are two contributions in this paper, first, a simple valuation model of dinner bonds is developed, and second, a proposal for a large-scale aid program for small businesses is set in a dinner bond based framework, with the addition of two features: (i) the support of a guarantor for businesses’ liabilities; and, (ii) the intervention of a financial regulator. The modified scheme also allows governments to leverage public policy actions on society’s goodwill.

Keywords: Binomial Tree; COVID-19; Dinner Bonds; Liquidity shock; Small Businesses

JEL Classification: G13; G23; G28; H12; H84