Abstract
For several reasons, governments may want to encourage commercial banks to offer credit to some specific groups. This paper analyzes a contract scheme that may help achieve this objective without inducing financial disintermediation or other adverse behavior. Two sources of information asymmetry are considered: between the government and the bank (credit might be diverted to borrowers not belonging to the targeted group); and between the bank and the borrower (the latter may divert credit to purposes other than stated). Compared to other policies, the scheme analyzed here is superior since it brings about lower interest rates and higher cooperation from banks to achieve the government's objective.
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