Why do small firms credit ration? How does it happen?

Expert Solution

SBA-guaranteed lending programs are one of many government interventions into markets aimed at promoting small business. The rationale for these guarantees appears to be that credit market imperfections can result in small enterprises being credit rationed—particularly for longer-term loans for purposes of such capital expansion. If SBA loan guarantees indeed reduce credit rationing in the markets for small business loans, then there should be a relationship between measures of SBA activities and economic growth. There is a positive (although small) and significant relationship between the level of SBA-guaranteed lending in a local banking market and future per capita income growth. These results should be interpreted with caution for several reasons.

First, we are unable to control for small business lending at the market level and, hence, we do not know whether SBA loan guarantees are contributing to growth by helping to complete the market or are simply proxying for small business lending in the market.

Second, we are not able to test whether SBA loan guarantees materially increase the volume of small business lending in a market—a question that is related to who captures the subsidy associated with SBA loan guarantees.

Rahul Sunny answered 1 year ago

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