Abstract

Public Financing Institutions as Subsidy-Policy Agents

Mechanisms for Political Lendings in "Pooling/Separating States of Balance"

Lendings made for subsidy-policy purposes, including the implementation of such lendings, often confront the implementing credit institutions with a complex uncertainty. One explanation of this uncertainty concerns the debtor’s behaviour, because the lender does not always know the type of borrower negotiating the loan or the way in which the borrower will behave after the credit agreement has been concluded. Another source of uncertainty is the process of political and internal banking co-ordination. From the credit institution’s point of view, this requires an appropriate and low-cost management of potential uncertainty factors. But on the other hand, the sovereign rights of potential recipients of promotion funds are not to be unduly restricted so as to ensure that the economic policy goals to be attained through the lending operation can actually be achieved. The present contribution analyses a credit agreement in whose framework specific incentive mechanisms as distinct from any “tough” conditions of contract, i.e. rigid control measures and strict rules of behaviour, are applied for the purpose of conditioning a debtor’s behaviour. The present analysis shows that a “soft” contract design including incentive mechanisms may, where the interest is in building a “good” credit risk reputation, avoid actions by the debtor that would otherwise run counter to the interests of the subsidy donor or lender. Against the background of politico-economic considerations, special characteristics of public credit institutions are detailed on this basis which adds a strategic perspective to the political discussion on “administrative units sourced out” in the banking sector.