Export Credit Guarantees, Moral Hazard and Exports Quality

We analyse the role played by export credit guarantees (ECGs) in encouraging exports to developing countries. The existence of moral hazard on the side of the firm is introduced. We show that the inability of the exporter's government to verify the actual quality of the product will limit its ability to encourage trade through ECGs, once the coverage provided goes beyond a certain threshold. This result provides a rationale behind the limited coverage on ECGs.