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Small firm credit market discrimination, SBA-guaranteed lending, and local market economic performance

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Author Info
Ben R. Craig
William E. Jackson, III
James B. Thomson

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Abstract

We empirically test whether SBA-guaranteed lending has a greater impact on economic performance in markets with a high percentage of potential minority small businesses. This hypothesis is predicated on priors related to three overlapping assumptions. These three assumptions are: (1) The classic type of credit rationing developed in the seminal paper by Stiglitz and Weiss (1981) is more likely to occur in markets with a higher per capita percentage of minority small businesses because such markets are more likely to have more severe information asymmetry problems, (2) SBA-guaranteed lending is likely to reduce these credit rationing problems—thus improving the level of development of the local financial market, and (3) increased local financial market development helps to lubricate the wheels of economic performance (Rajan and Zingales, 1998). Using local labor market employment rates as our measure of economic performance, we find evidence consistent with this proposition. In particular, we find a positive and significant impact on the average annual level of employment in a local market of SBA-guaranteed lending in that local market. This impact is 200 percent larger in markets with a high percentage of potential minority small businesses. This result has important implications for public policy in general and SBA-guaranteed lending in particular.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0613.

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Date of creation: 2006
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Handle: RePEc:fip:fedcwp:0613

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Keywords: Small business - Finance Small Business Administration Discrimination in consumer credit

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  31. Ben R. Craig & William E. Jackson, III & James B. Thomson, 2005. "SBA guaranteed lending and local economic growth," Working Paper 2005-28, Federal Reserve Bank of Atlanta. [Downloadable!]
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