A Study of the Effectiveness of Credit Subsidies: Evidence from a Panel of Italian Firms.

Working paper

Credit subsidies in targeted industrial sectors or geographical areas are a primary mechanism of industrial and redistributive policy throughout the world. Using a unique panel of bank-firm relationships, we study the impact of interest-rate subsidies on the total amount of borrowing and on the average cost of borrowing for subsidised firms. Even though they seem to promote the rise of new bank-firm relationships, subsidies have a relatively small effect on the total amount of borrowing when granted to existing clients. We also find evidence of a spillover effect of subsidies on non-subsidised interest rates, which is suggestive of possible rent-seeking activities undertaken by banks and their targeted borrowers. The size of the subsidy, the bank’s local market power, her informational advantage and the lenght of the bank-client relationship are found to be important determinants of the spillover effect.

Authors: Rapisarda, G; Patacchini, E

• Publisher: Department of Economics (University of Oxford)
• Series: Discussion paper series
• Publication date: 2003-01-01
• Language: English