Public schemes aiming at facilitating SMEs and young firms’ access to external finance are pervasive around the world. While these programs have been implemented for years, their evaluation has long been lagging behind. This task has however been taken up in a recent literature. Several contributions propose an assessment of the performance of directed lending programs (e.g. Bach [2005] for France, Banerjee and Duflo [2004] for India, Prantl [2006] for Germany) or start-up subsidies for the unemployed (Crepon and Duguet [2004]). Another strand of the literature focuses on policies specifically designed to support innovative start-ups (Lerner [1999] for the US, Brander, Egan and Hellmann [2007] for Canada). All of these public interventions share the common feature that they are direct subsidies, which take the form of low interest rates or cheap equity finance.
In the present contribution, we evaluate the effects of a loan guarantee program, which is to be considered as an indirect subsidy. Indeed, agencies in charge of these programs provide insurance to lenders against borrowers’ risk of default, while The (often subsidized) insurance premium is paid for by the borrower. The main rationale for this type of public intervention is the widespread belief that the lack of collateral hinders the access of new firms to external finance. Credit guarantee programs can be found in most OECD countries, as for instance in the US (SBA’s 7a Loan Program, described by Graig, Jackson and Thompson [2005]), the UK (Small Firms Loan Guarantee, launched in 1981), or France (SOFARIS, launched in the late 1980s). Yet, although widespread, these programs have rarely been evaluated using firm level data. In this paper, we rely on an exhaustive, large scale dataset to fill this gap.
Diamond (1984) showed that one of banks’ main functions and reasons for their existence is that they monitor the actions of their borrowers on behalf of the fund providers, the depositors. These because of free riding problems and excessive transaction costs can not undertake efficient monitoring themselves. The necessity of monitoring stems from the asymmetric distribution of information between banks and their debtors. Since the actions of a firm are not fully observable the firm may have incentives to undertake actions that are not desirable for a bank, i.e., actions that may increase the risk of non-repayment of the bank loan. To prevent their debtors from such actions banks monitor firms in order to induce them to behave in the way that is desirable for the bank.
Despite an active search for the reasons behind the large increase in (within-group) wage inequality in the United States over the last 30 years, identifying the culprit has proved elusive. In this paper we suggest that the increase in the variability of productivity shocks to occupations, coupled with the endogenous response of workers to this change, can account for most of the increase in within-group wage inequality.
