Public inputs and the credit market

Document Type

Article

Publication Title

International Tax and Public Finance

Abstract

This paper studies the impact of public goods provision in an adverse selection environment. Public inputs used collectively by firms have indirect spillovers in imperfect credit markets by affecting the random returns of borrowers in this market. Public inputs change the nature of the binding incentive constraint and mitigate distortions in the credit market. The magnitude of such indirect benefits depends upon the ‘type’ of the public input being considered. Public inputs targeted to benefit the less-efficient borrowers in the economy have greater indirect benefits as compared to pure public inputs that benefit all. These additional efficiency gains, emerging out of information-asymmetries in the credit market, should be considered in the cost-benefit analysis of such public inputs.

Publication Date

1-4-2006

Publisher

Springer

Volume

Vol.13

Issue

Iss.6

Link to Full Text
Request Access

Share

COinS