Credit guarantees in a credit market with adverse selection

Abstract

This paper deals with government interventions in agricultural credit markets in the Czech Republic. I first describe the institutional setting and the empirics of agricultural credit in the Czech Republic. I explain the activities of the Czech Agricultural Guarantee Fund and compare it with similar institutions dealing with the support of agricultural credit in transition and developed market economies. Then I introduce an adverse selection model of credit provision with proportional credit guarantees. The model distinguishes two market regimes - a developed post-transition market economy and a transition economy. This distinction between transition and post-transition economies leads to different results generated by credit markets. Most notably, there is a failure of collateral as a screening instrument in credit markets of transition economies. With economic stabilization collateral resumes its role as a screening instrument.