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This minimizes moral hazard problems that may arise if firms make excessive promises to their workers which will be fulfilled by the guaranteefund.
The guaranteefund takes resources away from the firm ex ante as a premium is paid.
The firm does not have resources to pay an ex ante premium to a guaranteefund.
The offering fund manager will bear the risk should the primary portfolio value fall short of the value of the guaranteefund.
Alternatively, one might consider other types of contracts between the guaranteefund and the firm to overcome the distortion in the continuation decision.
Intuitively, there are two main effects of a guaranteefund.
However, in this case we have some interesting interactions between the financing of the guaranteefund and the borrowing constraint.
Overall, the outcome under a guaranteefund will not be efficient.
Instead, they will rely entirely on the guaranteefund to support their workers.
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