Public Bank Guarantees and Allocative Efficiency

Arbeitspapier

In the wake of the recent financial crisis, many governments extended public guarantees to banks. We take advantage of a natural experiment, in which long-standing public guarantees were removed for a set of German banks following a lawsuit, to identify the real effects of these guarantees on the allocation of credit ('allocative efficiency'). Using matched bank/firm data, we find that public guarantees reduce allocative efficiency. With guarantees in place, poorly performing firms invest more and maintain higher rates of sales growth. Moreover, firms produce less efficiently in the presence of public guarantees. Consistently, we show that guarantees reduce the likelihood that firms exit the market. These findings suggest that public guarantees hinder restructuring activities and prevent resources to flow to the most productive uses.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IWH Discussion Papers ; No. 7/2015

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Empirical Analysis ; Allocative Efficiency; Cost-Benefit Analysis ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: banking ; public guarantees ; allocative efficiency ; Bankwesen ; staatliche Garantien ; Allokationseffizienz

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gropp, Reint E. ; Guettler, Andre ; Saadi, Vahid
• Event: Veröffentlichung
• (who): Leibniz-Institut für Wirtschaftsforschung Halle (IWH)
• (where): Halle (Saale)
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/112706
• URN: urn:nbn:de:gbv:3:2-48567
• Last update: 10.03.2025, 11:42 AM CET