The growth in government loan guarantee programs relative to other forms of intervention in credit markets prompts the question: Are loan guarantees necessarily better than other subsidies, particularly direct loans and grants, in providing benefits to targeted groups? The answer is: not in all cases. An analysis of the three loan programs in a credit economy model shows that direct loans perform best at targeting cash-poor entrepreneurs with good business prospects; loan guarantees attract relatively riskier businesses with few assets; and grants are least distortionary but are not targeted to any specific set of recipients.
Amanda L. Kramer
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