The wide-spread lockdowns that followed the outbreak of COVID-19 are having a substantial impact on the economy, in particular on small and medium-sized enterprises (SMEs). SMEs are especially vulnerable for economic shocks because of the “underlying condition”, that is their dependence on bank financing and related financial constraints. It is therefore not surprising that economists, politicians, and policymakers called for policies that support small businesses. A widespread policy response has been to initiate or amend existing credit guarantee programs. Nearly all countries (see below) put their guarantee program at the center of their strategy to alleviate SMEs financing problems. Although it is a seemingly efficient choice to use guarantee programs as policy choice because most countries could directly use the institutional framework of an existing guarantee program, it is not self-evident whether state guarantee programs are the right medicine to cure distressed SMEs.

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One key problem is limited liability. Shareholders have limited liability, meaning, if a company goes bankrupt, the shareholder’s loss will be limited to its investment. While limited liability could protect the private property of entrepreneurs, it also protects multinational corporations for large claims after an environmental disaster.

Continue reading “What allows corporations to act irresponsibly?” →