Optimum pricing of mutual guarantees for credit
- 310 Downloads
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.
- Bartoli, F., Ferri, G., & Murro, P. (2010). Bank-firm relations and the role of mutual guarantee institutions during crisis. Working paper on SSRN.Google Scholar
- De Gobbi, M. S. (2002). Making social capital work: Mutual guarantee societies for artisans. Working Paper, ILO.Google Scholar
- Independent Expert Group. (2003). Raising EU R&D. A Report to the European Commission.Google Scholar
- Independent Expert Group. (2005). Guarantees and Mutual Guarantees. Best Report: To the European Commission.Google Scholar
- Jensen, M. (1986). Agency costs of free cash flow, corporate finance and take-overs. American Economic Review, 76, 323–329.Google Scholar
- Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71, 393–409.Google Scholar
- Suran, B. S. (2008). Leveraging mutual guarantees for gaining financial access: Joint liability groups as collateral substitutes. In K. J. Karmakar (Ed.), Microfinance in India (pp. 409–424). Sage Publications (available also through SSRN).Google Scholar
- Zhang, W. (2008). Ex anta moral hazard and repayment performance under group lending. Journal of East Asia Studies, 6, 145–171.Google Scholar