We analyze the optimal pricing of government-sponsored bank debt guarantees within the context of an asset substitution framework. We show that the desirability of fair pricing of guarantees depends on the degree of transparency of the banking sector: in relatively opaque banking systems, fair...

We develop an asset substitution framework to analyze the desirability of fair pricing of government guarantees for bank liabilities. We find that fair pricing of guarantees is desirable if and only if the banking sector is sufficiently transparent. In opaque banking systems, there is little...

We analyze financial support for the entrepreneurial sector. State support can raise welfare by relaxing financial constraints, but it can also reduce lending standards if entrepreneurs substitute public sources of collateral for their own assets, if it encourages excessive entrepreneurial...