Optimum pricing of mutual guarantees for credit

• Published in: Small business economics Vol. 41; no. 1; pp. 253 - 262
• Main Authors: Kroll, Yoram, Cohen, Assaf
• Format: Journal Article
• Language: English
• Published: Boston Springer 01.06.2013; Springer US; Springer Nature B.V
• Subjects: Asymmetric information; Bank credit; Bank loans; Banks; Business and Management; Capital market; Capital markets; Cash flow; Contracts; Credit insurance; Entrepreneurship; Equity; Guarantees; Industrial Organization; Insurance coverage; Insurance premiums; Insurance providers; Interest rates; International organizations; Investors; Management; Microeconomics; Moral hazard; Negative net present value; Net present value; Pricing; Probability; Risk aversion; Small & medium sized enterprises-SME; Small and medium sized enterprises; Small business; Statistical analysis; Stockholders; Asymmetric information; L26; Underinvestment (UI); Overinvestment (OI); G22; G21; G32; Mutual guarantees; SME; Credit insurance; Moral hazard
• ISSN: 0921-898X; 1573-0913
• DOI: 10.1007/s11187-012-9430-3

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.