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Information problems in small enterprise credit markets can result in a market equilibrium characterized by credit rationing. These information problems are potentially more severe during sharp economic downturns such as the recent Great Recession. Government interventions to alleviate credit constraints on small firms need to be designed to correct the specific market failure resulting in socially suboptimal credit flows. The authors argue that Small Business Administration loan guarantees are a potentially appropriate intervention and provide a review of empirical research that supports their contention.
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