Optimum pricing of mutual guarantees for credit
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The main finding of this paper is that under financial market impediments and asymmetric information, a mutually guaranteed and correctly schemed and priced insurance credit contract should have an abnormal actuarial profit. Such a contract improves welfare by simultaneously eliminating underinvestment (UI) and overinvestment (OI) and by reducing the probability of the insurer’s ruin. This solution is relevant for mutual credit insurance agencies and international or governmental agencies interested in increasing the value creation of small and medium enterprises that suffer from limited access to equity and debt markets.
KeywordsCredit insurance Mutual guarantees Moral hazard Asymmetric information SME Underinvestment (UI) Overinvestment (OI)
JEL ClassificationsG21 G22 G32 L26
We sincerely thank two anonymous referees for their very helpful and constructive comments and suggestions.
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