Development finance institutions mobilize over $250 billion annually through blended finance operations, yet practitioners lack a unified framework to evaluate its catalytic effect and for choosing among instruments. I develop a model of investment multipliers under two canonical market failures-production externalities and credit market imperfections-and two instruments: subsidized loans and credit guarantees. Three results emerge. First, the catalytic multiplier is decreasing in the severity of the market failure, creating a fundamental tension: interventions targeting the largest distortions achieve the lowest leverage. Second, the relative efficiency of guarantees and subsidized loans depends on the accounting convention used to measure cost. The guarantee and subsidized loan yield equal multipliers for pure de-risking and for production externalities; the guarantee achieves a higher multiplier for financial frictions and, in most configurations, for credit rationing. Third, for subsidized loans, non-de-risking interventions always yield higher multipliers than interventions that fully eliminate default risk. For guarantees the ranking depends on the nature of the market failure. A practical rule of thumb emerges from the analysis: production externalities call for subsidized loans, while financial frictions are best addressed with guarantees. The paper shows that even though blended finance is not effective when default risk is high, full de-risking is rarely optimal.
