Objectives of social entrepreneurs and federal lending programs, and the optimal allocation of external funds [Elektronische Ressource] / Verf.: Christoph Starke

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• Wissenschaft

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• Publié par: otto-von-guericke-universitat_magdeburg
• Publié le: 01 janvier 2010
• Nombre de lectures: 25
• Langue: English

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OBJECTIVES OF SOCIAL ENTREPRENEURS
AND FEDERAL LENDING PROGRAMS,
AND THE OPTIMAL ALLOCATION
OF EXTERNAL FUNDS






Inauguraldissertation
zur Erlangung des akademischen Grades

Doctor rerum politicarum

vorgelegt und angenommen
an der Fakultät für Wirtschaftswissenschaft
der Otto-von-Guericke-Universität Magdeburg








Verfasser: Christoph Starke
Geburtsdatum und –ort: 26. August 1978, Magdeburg
Arbeit eingereicht am: 31. Mai 2010
Gutachter der Dissertation: Prof. Dr. Matthias G. Raith
Prof. Dr. Dr. h.c. Gerhard Schwödiauer
Datum der Disputation: 03. November 2010
TABLE OF CONTENTS

TABLE OF FIGURES ................................................................................................................................... III
1 INTRODUCTION .................................................................................................................................. 1
2 SOCIAL ENTREPRENEURS ............................................................................................................... 5
2.1 INTRODUCTION ................................................................................................................................ 6
2.2 RATIONING BY UNIFORM USER FEES AND NON-PRICE ALLOCATION INSTRUMENTS ..................... 20
2.2.1 THE MODEL. 20
2.2.2 INTERIOR AND CORNER SOLUTIONS ............................................................................................. 26
2.2.3 VARIATION IN DONATIONS ........................................................................................................... 33
2.2.4 CONCLUSION .............................................................................................................................. 39
2.2.5 APPENDIX.... 40
2.3 RATIONING BY USER-FEE DISCRIMINATION AND QUALITY DILUTION ........................................... 43
2.3.1 THE MODEL. 43
2.3.2 VARIATIONS IN DONATIONS AND INPUT COSTS ............................................................................. 52
2.3.3 CONCLUSION 57
2.3.4 APPENDIX: PROOF OF PROPOSITIONS 2.6-2.10 ........................................................................... 58
2.4 IMPLICATIONS FOR FUTURE RESEARCH .......................................................................................... 63
3 FEDERAL LENDING PROGRAMS .................................................................................................. 66
3.1 INTRODUCTION .............................................................................................................................. 67
3.2 FEDERAL LENDING OBJECTIVES ..................................................................................................... 71
3.3 THE MODEL..... 73
3.4 ALTERNATIVE LENDING STRUCTURES ........................................................................................... 76
3.4.1 FIXED GUARANTEE RATE, MARKET DETERMINED INTEREST RATE ................................................ 77
3.4.2 FIXED INTEREST SUBSIDIZATION, NO GUARANTEE ....................................................................... 78
3.5 OPTIMAL LENDING STRUCTURES ................................................................................................... 79
3.6 THE LENDING STRUCTURES OF THE SBA AND KFW ...................................................................... 84
3.7 GENERALIZATION OF THE MODEL .................................................................................................. 86
3.8 CONCLUSION.... 88
REFERENCES ............................................................................................................................................... 90
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TABLE OF FIGURES

Figure 2.1: Percent of population in developing countries living below $1.00-$2.50 a day
in 2005 ................................................................................................................................... 8
Figure 2.2: Sources of nonprofit income in 1995, by country ............................................. 10
Figure 2.3: Sources of nonprofit income in 1995, by field (7 countries) ............................ 11
Figure 2.4: The allocative outcome of rationing by user fees and the non-price instrument.
............................................................................................................................................. 23
Figure 2.5: A utility function for a moderate level of poverty aversion and the interior
optimum. .............................................................................................................................. 31
Figure 2.6: A decrease of the optimal project volume as the highly poverty-averse
entrepreneurial reaction. ...................................................................................................... 35
Figure 2.7: The shift of the utility function due to an increase in donations. ...................... 36
Figure 2.8: Allocation effects of the choice of quality and target group. ............................ 47
Figure 2.9: Corner allocations and an arbitrary interior solution. ....................................... 50
Figure 2.10: A complete shift of the target group as a weakly inequity-averse reaction on
an increase in input costs ..................................................................................................... 56
Figure 3.1: Comparison of the total funding volume of SBA and KfW between 2003 and
2009 ..................................................................................................................................... 70
Figure 3.2: Market curve, private rate of return function and the loan gap ......................... 74
Figure 3.3: Fixed guarantee rate, market determined interest rate ...................................... 78
Figure 3.4: Fixed interest subsidization, no guarantee ........................................................ 79
Figure 3.5: The costs of alternative lending structures 80
Figure 3.6: Minimal costs of the optimal lending structure ................................................ 82
Figure 3.7: Optimal lending structure in presence of processing costs ............................... 83
Figure 3.8: The lending policy of the SBA ......................................................................... 85
Figure 3.9: Transferability of derived results ...................................................................... 87



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1 INTRODUCTION















INTRODUCTION 2
Economic theory justifies governmental intervention in the market economy by the
existence of market failures. Through a well-targeted redistribution the government
eliminates such malfunctions and achieves a Pareto-optimal allocation of resources.
Standard textbooks on welfare economics pinpoint several causes for market failure, e.g.
asymmetric information, natural monopolies, externalities, and public goods.
The prevalence of market failures can be regarded as having both a limiting as well as
enhancing effect on entrepreneurship. Intuitively, the malfunction of markets relevant to
the formation of a firm complicates or even impedes its implementation, thereby
preventing opportunities for value creation from being exploited. A particularly serious
failure occurs in credit markets. Innovative and, thus, socially desirable start-ups cannot be
launched due to a lack of credit accessibility. The positive externalities caused by the
dissemination of new information are not taken into account by private banks when
making their financing decisions. Governments across the world have recognized this
market failure and, in response, have initiated so-called federal lending programs. With
external tax revenues at hand, they subsidize interest rates or guarantee private lending.
However, governments do not always intervene and market failures remain partly
uncorrected. The elimination of these failures constitutes opportunities for entrepreneurs to
create social value through a privately organized reallocation of externally raised funds,
e.g. donations or grants. Individuals exploiting such opportunities are typically classified
social entrepreneurs. There is a broad consensus among scientists that the internalization
of externalities caused by poverty, i.e. some individuals perceive a disutility caused by low
satisfaction levels of others’ basic human needs, represents one of the most challenging
opportunities for social value creation.
In this dissertation we investigate optimal market failure correction from both the
private and governmental perspective. More specifically, we theoretically analyze the
optimal allocation of external funds by social entrepreneurs aiming at alleviating poverty,
on the one hand, and federal lending programs aiming at securing credit accessibility for
innovative start-ups, on the other hand. To this date,