Economic Theory

, Volume 58, Issue 1, pp 1–30 | Cite as

The effects of credit subsidies on development

  • António Antunes
  • Tiago Cavalcanti
  • Anne Villamil
Research Article

Abstract

Under credit market imperfections, the marginal product of capital may not be equalized, resulting in misallocation and lower output. Preferential interest rate policies are often used to remedy the problem. This paper constructs a general equilibrium model with heterogeneous agents, imperfect enforcement and costly intermediation. Occupational choice and firm size are determined endogenously by an agent’s type (ability and net wealth) and credit market frictions. The credit program subsidizes the interest rate on loans and requires a fixed application cost, which might be null. We find that the credit subsidy policy has no significant effect on output, but it may have negative effects on wages. The program is largely a transfer from households to a small group of entrepreneurs with minor aggregate effects. We also provide estimates of the effects of reducing the frictions directly. When comparing differences in US output per capita in a baseline case to simulations with counterfactually high frictions, intermediation costs and enforcement explain about 20–25 % of the output gap. We include a transition analysis.

Keywords

Financial frictions Credit subsidy Entrepreneurship 

JEL Classification

E60 G38 O11 

References

  1. Acemoglu, D., Zilibotti, F.: Was prometheus unbound by chance? Risk, diversification and growth. J. Polit. Econ. 105(4), 709–751 (1997)CrossRefGoogle Scholar
  2. Alexopoulos, J., Cavalcanti, T.V.: Cheap home goods and persistent inequality. Econ. Theory 45(3), 417–451 (2010)CrossRefGoogle Scholar
  3. Amaral, P., Quintin, E.: Limited enforcement, financial intermediation and economic development: a quantitative assessment. Int. Econ. Rev. 51(3), 785–811 (2010)CrossRefGoogle Scholar
  4. Antunes, A., Cavalcanti, T.: Start up costs, limited enforcement, and the hidden economy. Eur. Econ. Rev. 51(1), 203–224 (2007)CrossRefGoogle Scholar
  5. Antunes, A., Cavalcanti, T., Villamil, A.: Computing general equilibrium models with occupational choice and financial frictions. J. Math. Econ. 44(7–8), 553–568 (2008a)CrossRefGoogle Scholar
  6. Antunes, A., Cavalcanti, T., Villamil, A.: The effect of financial repression & enforcement on entrepreneurship and economic development. J. Monet. Econ. 55(2), 278–298 (2008b)CrossRefGoogle Scholar
  7. Antunes, A., Cavalcanti, T., Villamil, A.: Costly intermediation & consumption smoothing. Econ. Inq. 51(1), 459–472 (2013)CrossRefGoogle Scholar
  8. Armendariz de Aghion, B.: Development banking. J. Dev. Econ. 58(1), 83–100 (1999)CrossRefGoogle Scholar
  9. Armendariz de Aghion, B., Morduch, J.: The economics of microfinance. MIT Press, Cambridge (2005)Google Scholar
  10. Azariadis, C., Kaas, L.: Is dynamic general equilibrium a theory of everything? Econ. Theory 32, 13–41 (2007)CrossRefGoogle Scholar
  11. Banerjee, A.V., Moll, B.: Why does misallocation persist? Am. Econ. J. Macroecon. 2(1), 189–206 (2010)CrossRefGoogle Scholar
  12. Banerjee, A.V., Newman, A.F.: Occupational choice and the process of development. J. Polit. Econ. 101(2), 274–298 (1993)CrossRefGoogle Scholar
  13. Bech, M.L., Rice, T.: Profits and balance sheet developments at U.S. commercial banks in 2008. Fed. Reserv. Bull. 95, A57–A97 (2009)Google Scholar
  14. Beck, T., Demirgüç-Kunt, A., Levine, R.E.: A new database on financial development and structure (Updated December 2009). Policy Research Working Paper (2009)Google Scholar
  15. BNDES: Relatório Gerencial Trimestral: 4o Trimestre de 2010. Discussion paper, Banco Nacional de Desenvolvimento Econômico e Social (2010)Google Scholar
  16. Buera, F.J., Kaboski, J.P., Shin, Y.: The macroeconomics of microfinance. NBER Working Paper No. 17905 (2012)Google Scholar
  17. Buera, F.J., Moll, B., Shin, Y.: Well-intended policies. Rev. Econ. Dyn. 16(1), 216–230 (2013)CrossRefGoogle Scholar
  18. Buera, F.J., Shin, Y.: Financial frictions and the persistence of history: a quantitative exploration. J. Polit. Econ. 121(2), 221–272 (2013)Google Scholar
  19. Cagetti, M., De Nardi, M.: Estate taxation, entrepreneurship, and wealth. Am. Econ. Rev. 99(1), 85–111 (2009)CrossRefGoogle Scholar
  20. Caselli, F., Gennaioli, N.: Economics and politics of alternative institutional reforms. Q. J. Econ. 123(2), 1197–1250 (2008)CrossRefGoogle Scholar
  21. Castañeda, A., Díaz-Giménez, J., Ríos-Rull, J.-V.: Accounting for the U.S. earnings and wealth inequality. J. Polit. Econ. 111(4), 818–857 (2003)CrossRefGoogle Scholar
  22. Castro, R., Clementi, G.L., MacDonald, G.: Investor protection, optimal incentives, and economic growth. Q. J. Econ. 119(3), 1131–1175 (2004)CrossRefGoogle Scholar
  23. Claessens, S., Feijen, E., Laeven, L.: Political connections and preferential access to finance: the role of campaign contributions. J. Financ. Econ. 88(3), 554–580 (2008)CrossRefGoogle Scholar
  24. de Meza, D., Webb, D.C.: Credit market efficiency and tax policy in the presence of screening costs. J. public Econ. 36(1), 1–22 (1988)Google Scholar
  25. Demirgüç-Kunt, A., Huizinga, H.: Determinants of commercial bank interest margins and profitability: some international evidence. World Bank Econ. Rev. 13, 379–408 (1999)CrossRefGoogle Scholar
  26. Erosa, A., Hidalgo-Cabrillana, A.: Finance as a theory of TFP, cross-industry productivity differences, and economic rents. Int. Econ. Rev. 49(2), 437–473 (2008)CrossRefGoogle Scholar
  27. Gale, W.G.: Economic effects of federal credit programs. Am. Econ. Rev. 81(1), 133–152 (1991)Google Scholar
  28. Galor, O., Zeira, J.: Income distribution and macroeconomics. Rev. Econ. Stud. 60(1), 35–52 (1993)CrossRefGoogle Scholar
  29. Gokhale, J., Kotlikoff, L.: The baby boomers’ mega-inheritance—myth or reality? Economic Commentary, Federal Reserve Bank of Cleveland (2000)Google Scholar
  30. Gollin, D.: Getting income shares right. J. Polit. Econ. 110(2), 458–474 (2002)CrossRefGoogle Scholar
  31. Gourinchas, P., Jeanne, O.: The elusive gains from international financial integration. Rev. Econ. Stud. 73(3), 715–741 (2006)CrossRefGoogle Scholar
  32. Greenwood, J., Jovanovic, B.: Financial development, growth, and distribution of income. J. Polit. Econ. 98(5), 1076–1107 (1990)CrossRefGoogle Scholar
  33. Greenwood, J., Sanchez, J., Wang, C.: Financing development: the role of information costs. Am. Econ. Rev. 100(4), 1875–1891 (2010)CrossRefGoogle Scholar
  34. Heston, A., Summers, R., Aten, B.: Penn World Table Version 6.2. Center for International Comparisons at the University of Pennsylvania (CICUP) (2006)Google Scholar
  35. Heston, A., Summers, R., Aten, B.: Penn World Table Version 7.1. Center for International Comparisons at the University of Pennsylvania (CICUP) (2012)Google Scholar
  36. Jeong, H., Townsend, R.M.: Sources of TFP growth: occupational choice and financial deepening. Econ. Theory 32, 179–221 (2007)CrossRefGoogle Scholar
  37. Jones, L.E., Manuelli, R.E., Rossi, P.E.: Optimal taxation in models of endogenous growth. J. Polit. Econ. 101, 485–517 (1993)CrossRefGoogle Scholar
  38. Kaufmann, D., Kraay, A., Mastruzzi, M.: Governance matters III: updated governance indicators for 1996–02. Policy Research Working Paper 3106, World Bank (2003)Google Scholar
  39. Koeppl, T., Monnet, C., Quintin, E.: Efficient contract enforcement. Econ. Theory 55(1), 161–183 (2014)CrossRefGoogle Scholar
  40. Lazzarini, S.G., Musacchio, A.: Leviathan as a mninority shareholder: a study of equity purchases by the Brazilian National Development Bank (BNDES), 1995–2003”, Harvard Business School Working Papers 11–073 (2011)Google Scholar
  41. Lee, J.-W.: Government interventions and productive growth. J. Econ. Growth 1(3), 391–414 (1996)CrossRefGoogle Scholar
  42. Li, W.: Entrepreneurship and government subsidies: a general equilibrium analysis. J. Econ. Dyn. Control 26(11), 1815–1844 (2002)CrossRefGoogle Scholar
  43. Lucas Jr, R.E.: On the size distribution of business firms. Bell J. Econ. 9(2), 508–523 (1978)CrossRefGoogle Scholar
  44. Maddison, A.: Monitoring the world economy. Organization for Economic Cooperation and Development, Paris (1995)Google Scholar
  45. McGrattan, E.R., Prescott, E.C.: Is the stock market overvalued? Fed. Reserv. Bank Minneap Q. Rev. 24(4), 20–40 (2000)Google Scholar
  46. Mehra, R., Prescott, E.C.: The equity premium: a puzzle. J. Monet. Econ. 15, 145–162 (1985)CrossRefGoogle Scholar
  47. Midrigan, V., Xu, D.Y.: Finance and misallocation: evidence from plant-level data. Am. Econ. Rev. (Forthcoming) (2013)Google Scholar
  48. Ottaviano, G.I.P., de Sousa, F.L.: O Efeito do BNDES na Produtividade das Empresas. In: DeNegri, J.A., Kubota, L.C. (eds.) Políticas de Incentivo à Inovação e Crescimento das Empresas, IPEA, Brasília (2008)Google Scholar
  49. Peiris, M.U., Vardoulakis, A.P.: Savings and default. Econ. Theory 54(1), 153–180 (2013)CrossRefGoogle Scholar
  50. Quadrini, V.: The importance of entrepreneurship for wealth concentration and mobility. Rev. Income Wealth 45(1), 1–19 (1999)Google Scholar
  51. Quadrini, V.: Entrepreneurship, saving, and social mobility. Rev. Econ. Dyn. 3(1), 1–40 (2000)CrossRefGoogle Scholar
  52. Quintin, E.: Limited enforcement and the organization of production. J. Macroecon. 30(3), 1222–1245 (2008)CrossRefGoogle Scholar
  53. Rajan, R.G., Zingales, L.: The great reversals: the politics of financial development in the twentieth century. J. Financ. Econ. 69(1), 5–50 (2003a)CrossRefGoogle Scholar
  54. Rajan, R.G., Zingales, L.: Saving capitalism from the capitalists. Random House, Crown Business. ISBN 978-1-4000-4916-5 (2003b)Google Scholar
  55. Ribeiro, E.P., DeNegri, J.A.: Estimating the causal effect of access to public credit on productivity: the case of Brazil. Universidade Federal do Rio de Janeiro, Mimeo (2010)Google Scholar
  56. Sant’Anna, A.A., Borça-Junior, G.R., de Araujo, P.Q.: Mercado de Crdito no Brasil: Evolu Recente e o Papel do BNDES (2004–2008). Revista do BNDES 16(31), 41–60 (2009)Google Scholar
  57. Smith, B.D., Stutzer, M.J.: Credit rationing and government loan programs: a welfare analysis. AREUEA J. 17(2), 177–193 (1989)CrossRefGoogle Scholar
  58. Stiglitz, J.E.: The role of the state in financial markets. In: Proceedings of the World Bank Annual Conference on Development (1994)Google Scholar
  59. Stiglitz, J.E., Weiss, A.M.: Credit rationing in markets with imperfect information. Am. Econ. Rev. 71(3), 393–410 (1981)Google Scholar
  60. Torres-Filho, E.T.: Mecanismos de Direcionamento do Crédito, Bancos de Desenvolvimento e a Experiência Recente do BNDES. In: Ferreira, F.M.R., Meirelles, B.B. (eds.) Ensaios Sobre Economia Financeira, BNDES, Rio de Janeiro (2009)Google Scholar
  61. Wynne, J.: Wealth as a determinant of comparative advantage. Am. Econ. Rev. 95(1), 226–254 (2005)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  • António Antunes
    • 1
    • 2
  • Tiago Cavalcanti
    • 3
  • Anne Villamil
    • 4
    • 5
  1. 1.Departamento de Estudos EconómicosBanco de PortugalLisbonPortugal
  2. 2.Faculty of EconomicsNOVA SBELisbonPortugal
  3. 3.Faculty of EconomicsUniversity of CambridgeCambridgeUK
  4. 4.Department of EconomicsUniversity of IowaIowa CityUSA
  5. 5.Department of EconomicsUniversity of ManchesterManchesterUK

Personalised recommendations