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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Ludwig, Sandra / Schmitz, Hendrik

Ed. by Auriol, Emmanuelle / Barigozzi, Francesca / Brunner, Johann / Fleck, Robert / Mastrobuoni, Giovanni / Mendola, Mariapia / Requate, Till / de Vries, Frans / Wenzel, Tobias / Zulehner, Christine

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Volume 17, Issue 4


Volume 19 (2019)

Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

Structuring Subsidies in a Long-Term Credit Relationship

Eric Van Tassel
  • Corresponding author
  • Department of Economics, Florida Atlantic University, 777 Glades Rd., Boca Raton, FL 33431, USA
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Published Online: 2017-08-11 | DOI: https://doi.org/10.1515/bejeap-2017-0028


We study a credit market using an infinite horizon model where an altruistic lender offers loans to agents for production projects that may grow over time. The lender funds the loans using a combination of external debt and subsidies. The optimal way for the lender to subsidize the credit relationships depends on the probability of project growth. When growth is less likely, it is best to commit to ongoing subsidies. However, for a range of growth probabilities, ongoing subsidization may not be credible and this can have negative efficiency implications.

Keywords: credit relationship; subsidy; strategic default

JEL Classification: D86; G21; O16


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Published Online: 2017-08-11

Citation Information: The B.E. Journal of Economic Analysis & Policy, Volume 17, Issue 4, 20170028, ISSN (Online) 1935-1682, DOI: https://doi.org/10.1515/bejeap-2017-0028.

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